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ECONOMICS  AND  THE 
COMMUNITY 


ECONOMICS  AND  THE 
COMMUNITY 


BY 


JOHN  A.  LAPP,  LL.D. 

AUTHOR    OF   "our    AMERICA,"    "LEARNING   TO    EARN," 

"the    FUNDAMENTALS    OF    CITIZENSHIP," 

"civics  CATECHISM,"  ETC. 


ILLUSTRATED  WITH 
PHOTOGRAPHS 


NEW  YORK 

THE  CENTURY  CO. 

1926 


Copyright,   1922,  by 
The  Century  Co. 


Printed  in  the  U.  S.  A. 


H3 
II  IS 


INTRODUCTION 

This  book  has  been  written  as  an  attempt  to  place  the 
principles  and  problems  of  economic  life  in  their  relation 
to  the  community,  in  so  simple  a  form  that  the  study 
thereof  might  be  of  greater  service  to  the  citizen  in  the 
performance  of  civic  duties.  It  is  the  purpose  of  the 
book  to  give  what  the  citizen  needs  to  know  about  eco- 
nomics rather  than  to  explore  and  expound  economic 
theory. 

A  glance  at  the  problems  of  civil  society  today  discloses 
that  to  a  large  degree,  economic  problems  are  the  issues 
which  dominate  elections,  law  making  and  administrative 
actions.  In  fact  the  great  central  purpose  of  govern- 
ment— the  protection  and  welfare  of  the  citizens — is  seen 
to  take  on  economic  aspects  when  we  consider  and  deter- 
mine such  questions  as  the  prevention  of  civil  disorder, 
trade  abuses,  exploitation,  monopoly,  waste  of  resources 
or  when  we  consider  the  positive  side  in  the  promotion  of 
transportation,  mediums  of  exchange,  banking,  interna- 
-  tional  trade  or  the  education  of  producers  and  consumers 
ii)  through  schools,  laboratories,  statistics  and  research. 
y  Taxation,  the  life  principle  of  the  state,  constitutes  a  com- 
bined political  and  economic  problem.  Taxes  must  be 
levied  to  support  the  government,  but  they  must  not  be  so 
high  as  to  destroy  legitimate  production. 

Whether  the  economic  problem  be  the  tariff,  conserva- 
tion, thrift,  insurance,  good  roads,  regulation  of  railroads 


^78315 


vi  INTRODUCTION 

or  the  prevention  of  false  weights  and  measures,  it  is 
entwined  with  community  action  because  the  citizens 
decide  such  matters  in  the  long  run  through  the  election 
of  representatives  or  by  referendum. 

These  truths  are  so  obvious  as  to  need  no  elaboration. 
Yet  how  strange  that  the  study  of  the  subject  of  eco- 
nomics, so  vital  to  community  safety  and  welfare,  has 
been  so  largely  neglected !  That  which  should  be  im- 
parted to  all  citizens  as  a  common  civic  necessity  has  been 
postponed  to  the  upper  grades  in  high  school  or  even  to 
the  college,  if  indeed  it  is  given  at  all.  Obviously,  if  we 
are  to  meet  the  needs  of  the  citizen,  economics  in  its  com- 
munity relations  should  be  brought  forward  in  the  cur- 
riculum as  far  as  possible  and  certainly  to  the  first  years 
in  high  school,  the  vocational  schools  and  continuation 
classes.  It  should  be  borne  in  mind  that  only  a  small 
part  of  the  future  citizens  reach  the  upper  grades  in  high 
school.  Over  ninety  per  cent  have  left  before  those 
grades  are  reached. 

The  materials  presented  in  this  book  are  designed  to 
be  in  form  for  the  use  of  those  who  are  beginning  the 
study,  whether  in  high  school  grades,  junior  high  schools, 
vocational  schools  or  continuation  classes. 

The  difficulties  which  have  perhaps  hindered  the  wide- 
spread teaching  of  economics  have  been  due  to  the  lack 
of  concrete  text  material  related  to  community  life.  The 
same  difficulties  formerly  confronted  the  teachers  of  civil 
government.  Just  as  the  study  of  the  social  and  civic 
environment  enlivened  the  teaching  of  civil  government 
and  brought  it  into  the  elementary  grades  in  the  form  of 
community  civics,  so  we  may  expect  a  like  result  for  the 


INTRODUCTION  vii 

teaching  of  economics  from  the  study  of  economic  prob- 
lems in  the  community  lal^oratory.  A  wider  appeal  will 
thus  he  made  to  younger  students,  and  especially  to  those 
who  profit  by  concrete  instruction. 

The  plan  of  instruction  outlined  provides  for  a  pre- 
liminary gathering  of  local  data  for  each  chapter  before 
beginning  the  study  of  the  text.  Questions  for  com- 
munity surveys  therefore  precede  the  text.  With  the  pre- 
liminary data  in  hand  the  text  may  be  studied  more  con- 
cretely. The  material  collected  should  be  classified  and 
retained  as  a  permanent  file  of  materials,  but  fresh  data 
and  reports  should  be  gathered  for  each  succeeding  class. 
Public  reports  should  be  secured  for  comparison  with  the 
data  in  the  text,  thereby  serving  the  additional  purpose  of 
bringing  the  students  into  touch  with  government  activ- 
ities through  the  reports  of  the  various  local,  state  and 
national  offices  and  departments. 

This  method  of  instruction  should  result  in  an  under- 
standing of  economic  principles  and  problems  in  connec- 
tion with  current  affairs.  The  test  for  examination 
might  well  be  one  to  determine  how  efficiently  the  student 
has  been  able  to  observe  and  understand  comnumity 
activities  in  the  light  of  the  discussion  of  the  principles 
and  problems  in  the  text.  That  is  the  final  test  which 
good  citizenship  fixes  upon  all  who  determine  community 
action  by  their  ballots. 

J.  A.  L. 
January  21st,  1922. 


CONTENTS 


I     Community   Economics 3 

II     Consumption i6 

III  Production        32 

IV  Distribution  of  Goods 48 

V     Business  Organization 69 

VI     Transportation 86 

VII  Competition  and  Monopoly       ....  105 

VIII     Distribution  of  Income 116 

IX     Value  and  Price 135 

X     Money 147 

XI     Banking 164 

XII     Insurance 187 

XIII  Savings  and  Investment 203 

XIV  Employees  and  Employers 222 

XV     Cooperation 237 

XVI     Agricultural  Problems 250 

XVII  The  Economic  Problems  of  Cities     .      .  264 

XVIII     International  Trade 277 

XIX     Taxation 291 

XX     Conservation 305 

XXI     Statistics 3^9 

XXII     Social  Controi 333 

List  of  Books  to  Which  References  Are 

Made 355 

Index 357 

ix 


ILLUSTRATIONS 


PACE 


The  occupations  of  the  people  of  the  U.  S.  in  1910     .  4 
A  rural  shipping  point,  Fillmore,  X.  Y.     From  thou- 
sands of  places  like  this  farm  products  are  shipped  6 

Modern  shipping 7 

Loading  fruit  in  the  tropics 8 

Supplying  the  people's  needs 17 

Rubber  plantation 21 

Picking  cotton 22 

How  the  people  spent  their  money  in  1900- 1902  and  in 

1918-1919         25 

The  education  of  consumers 28 

Training  teachers  of  domestic  science,  Columbia  Uni- 
versity          29 

A  source  of  raw  materials 35 

Copper  mining 36 

Shoe  industry 40 

Learning  to  be  producers 45 

Country  trading  center 49 

Loading  cars  with  produce 50 

Cold  storage  plant .  53 

The  wheat  pit 57 

The  mailing  of  packages  in  a  large  mail-order  house  .  61 

Interior  of  a  department  store 62 

Purchasing  department  of  a  large  industry  ....  65 


xii  ILLUSTRATIONS 


PAGE 


Partnership  agreement ']2 

A  share  of  common  stock 75 

Board  of  Directors'  meeting yj 

A  pubhc  enterprise 80 

Employment  department  of  an  industry' 83 

Diagram  of  corporate  business  organization  ....  84 

Old  Appian  Way,  Rome 88 

Development  of  transportation 90 

Sorting  mail  in  a  large  post  office 96 

Refrigerator   car 98 

The  Interstate  Commerce  Commission  in  session  .      .  102 

Street  car  service  is  a  monopoly  here 108 

Oil  pipes  leading  in  from  Ohio,  Missouri,  Pennsylvania 

and  Kansas  to  South  Bayonne,  New  Jersey         .  no 

The  distribution  of  cost  of  manufactures,  1914     .      .  117 

No  rent  land 122 

Site  value 123 

A  scene  of  barter 148 

Interior  U.  S.  Mint 155 

Money  in  circulation  June  30,  1919 156 

A  printing  press  in  the  U.  S.  Bureau  of  Engraving  and 

Printing 160 

Interior  of  a  New  York  bank 165 

A  deposit  slip 168 

A  bank  check 169 

A  traveler's  check 171 

N.  Y.  Clearing  House 179 

Federal  Reserve  Bank  Districts 180 

U.  S.  Federal  Reserve  Board,  1922 181 


ILLUSTRATIONS  xiii 


PAGE 


A  bank  statement 184 

Fire  ruins  of  a  city 199 

Files  of  reports  made  to  New  York  Department  of  In- 
surance         200 

A  line  of  bank  depositors 205 

Postal    Savings    Department,    New    York    City    Post 

Office 208 

Thrift  Poster 209 

Teaching  habits  of  thrift  through  the  school  bank  .      .  211 

A  railroad  bcjnd 218 

Part  of  the  coupons  of  the  railroad  bond     ....  219 

Meeting  of  railroad  employers  and  employees  .      .      .  224 

A  board  of  arbitration  in  session 228 

Share-holding    employees    attend    huge    stockholders' 

meeting  of  the  Firestone  Tire  &  Rubber  Co.     .  231 

I'ulilic  employment  office 233 

Ivural  grain  elevators,  Ilettings.  Iowa 238 

Cooperative  milk  plant 239 

Exterior  view  of  a  cooperative  store 240 

Packing  canteloupes  on  a  melon  ranch  in  the  famous 

Imperial  Valley,  in  Southern  California     .      .      .  242 

Sandusky  tractor  drilling 251 

Farm  ownership  in  U.  S 254 

Farm  loan  districts 258 

Bad    road 260 

Same  road  after  improvement 261 

The  growth  of  city  populations 265 

Connecting  country  and  city 273 

American  Legation.   Portugal,  where  differences  may 

be  ironed  out 279 


xiv  ILLUSTRATIONS 


PAGE 


Where  we  buy  our  goods 284 

The  customers  of  the  U.  S 285 

L'.  S.  Treasury  Building,  Washington,  D.  C.  .      .       .  292 

Line  of  taxpayers 296 

Where  the  income  of  the  states  comes  from  .      .      .  300 

Where  the  income  of  the  cities  comes  from     .      .      .  300 

How  the  cities  spend  their  revenues 302 

How  one  city's  money  is  spent 302 

Open  hearth  coke  ovens 308 

The  waste  of  petroleum 309 

Waste  from  forest  fires 313 

Teaching  safety  first .      .316 

A  graphic  presentation 321 

Deaths  from  typhoid  fever  in  North  Yakima.  Wash- 
ington                     .      .  328 

How  the  state  serves  industry 335 

Pure-bred  corn,  symbol  of  scientific  agriculture    .      .  336 

The  Gatum  locks  of  the  Panama  Canal 338 

Determining  the  best  clayworking  practice  in  the  labor- 
atory and  workshop 350 

Books  to  aid  business 351 

A  corner  in  the  business  branch  of  the  Indianapolis 

Public  Library 352 


ECONOMICS  AND  THE 
COMMUNITY 


ECONOMICS   AND   THE 
COMMUNITY 


CHAPTER  I 

COMMUNITY    ECONOMICS 
Community  Survey 

1.  What  are  the  products  of  your  community? 

2.  What  products  are  sent  to  other  communities? 

3.  Name  all  of  the  principal  occupations  in  which  people 

engage  in  your  community. 

4.  Which  are  the  most  important  to  the  community? 

The  student  of  economics  will  get  a  clearer  view  of  the 
subject  at  the  gtart  by  observing  and  listing  the  activities 
that  are  taking  place.  These  activities  consist  principally 
in  producing,  transporting,  buying,  and  selling  goods,  and 
in  the  furnishing  of  services,  to  satisfy  human  wants. 

With  few  exceptions,  all  able-bodied  men  and  women 
are  engaged  in  work  of  some  kind.  The  majority  of  men 
produce  or  distribute  goods  or  perform  services  in  order 
that  they  may  provide  themselves  and  their  dependents 
with  the  means  of  livelihood  and  enjoyment ;  some  men 
work  to  acquire  property  for  a  variety  of  reasons,  and 
some  seek  to  be  influential  through  the  value  of  their 

3 


4  ECONOMICS  AND  THE  COMMUNITY 

services.      These   motives   cause   men    to   work    and   to 
achieve.     We  see  the  results  in  the  activities  around  us. 

Specialization  of  Lobar 

In  earlier  times,  before  the  development  of  transporta- 
tion, individuals  or  families  supplied  for  themselves  the 
bulk  of  the  goods  they  used,  or  at  least  each  community 
provided  almost  entirely  for  its  own  needs.  In  remote 
regions  and   uncivilized  countries   individuals  and   com- 


The  occupations  of  the  people  of  the  U.  S.  in  1910 

munities  still  produce  a  large  part  of  the  goods  they  use. 
The  great  majority  of  people,  however,  produce  certain 
goods,  and  rely  upon  others  to  produce  other  goods  that 
they  need  or  want.  The  growth  of  transportation  and 
means  of  distribution  have  made  this  possible.  Each  per- 
son in  civilized  countries  produces  a  small  part  of  what 
he  consumes.  Some  people  do  not  consume  any  of  the 
goods  that  they  produce.  The  combined  work  of  all 
provides  for  the  wants  of  all. 


COMMUNITY  ECONOMICS  5 

Formerly  the  clothes  for  the  family  were  made  in  the 
home  from  home-grown  and  home-spun  wool,  flax,  or 
cotton.  Now  the  clothing  for  the  family  is  made  in 
factories  by  thousands  of  workers  and  scores  of  processes, 
from  materials  grown  in  distant  places  and  transported 
and  handled  by  a  variety  of  agencies. 

Workers  are  engaged  in  thousands  of  different  occu- 
pations. Thousands  of  workers  may  be  employed  in 
producing  a  single  article.  Each  worker  may  perform 
only  a  single  process.  The  work  of  all  combines  to 
produce  the  completed  article.  It  is  said  to  require  as 
many  as  eighty- four  special  processes  in  certain  factories 
to  make  a  pair  of  shoes.  No  single  worker  makes  a 
complete  pair  of  shoes,  but  the  eighty- four  workers 
operating  machines  produce  many  pairs  of  shoes  in  a 
single  day.  While  one  group  of  workers  is  producing 
shoes  for  thousands  of  people,  other  groups  are  producing 
other  articles. 

Specialization  by  Communities  and  Countries 

Communities  and  countries  also  specialize  in  production. 
Each  country  or  community  produces  what  it  is  best 
adapted  to  produce,  and  exchanges  with  other  communities 
or  countries  for  the  additional  goods  that  it  needs.  No 
country  or  community  supplies  all  that  is  deemed  neces- 
sary for  its  own  people. 

Many  countries  and  communities  supply  all  or  nearly 
all  of  certain  products.  Chile  has  the  principal  deposits 
of  nitrates;  Japan  and  China  supply  most  of  the  tea  used 
in  the  world ;  coal  and  iron  are  limited  in  supply  principally 
to  five  or  six  countries ;  silk  is  produced  largely  in  France, 


6  ECONOMICS  AND  THE  COMMUNITY 

Japan  and  Italy;  the  United  States  manufactures  most 
of  the  world's  agricultural  implements  and  electrical 
equipment;  all  countries  in  temperate  climates  produce 
wheat,  but  the  bulk  of  supplies  comes  from  the  United 
States,  Canada,  and  Russia.  These  are  merely  examples 
of  specialization  by  countries.  A  list  of  national  or 
community  specialization  could  readily  be  made  from  a 
standard  text-book  in  geography  or  physical  geography. 


A  rural  shipping  point,  Fillmore,  X.  Y.     From  thousands  of  places 
like  this  farm  products  are  shipped 

Alany  thousands  of  separate  products  are  imported  or 
exported  each  year  by  the  jx^ople  of  different  countries. 
The  vast  exchanges  of  goods  between  country  and  country 
emphasize  to  everyone  the  importance  of  the  economic 
processes  by  which  the  whole  world  supplies  the  wants 
of  the  [>eople  of  each  country. 

The  morning  meal  gives  us  a  striking  illustration  of 
the  way  we  call  upon  the  world  to  supply  our  own  needs. 


COMMUNITY  ECONOMICS  7 

The  grapefruit  came  from  California  or  Florida;  the 
coffee  from  f5razil ;  the  corn-Hakes  from  the  Middle  West; 
the  bacon  from  Chicago,  whence  it  came  from  the  farms 
of  Iowa,  Illinois  or  Indiana;  the  eggs  from  the  surround- 
ing country,  perhajjs,  but  possibly  from  distant  farms. 
If  we  should  carry  the  examination    further  we  would 


Modern  shipping 

find  that  the  breakfast-room  equipment  also  came  from 
many  countries. 

Many  of  the  present  generation  can  remember  when 
their  own  community  provided  for  a  much  larger  part 
of  its  needs  than  it  does  now.  Transportation  has  been 
improved,  distances  have  been  cut  down,  and  we  reach 
farther  out   for  products   that  we  need  or  want.     For 


8 


ECONOMICS  AND  THE  COIMMUNITY 


illustration :  Milk  is  brought  to  New  York  City  from  a 
distance  of  more  than  four  hundred  miles,  although  milk 
is  a  highly  perishable  product.  Perishable  fruits  are 
transported  from  the  tropics  to  all  parts  of  the  world. 

Our  dependence  upon  other  people  and  upon  far-distant 
places    for  useful   things   increases   with  the  growth  of 


Loadiriu   iruil  in  tlic  Tropics 

knowledge  and  invention,  and  with  the  improvement  of 
processes  of  production,  transportation,  and  distribution. 
New  products  are  found;  new  inventions  require  the  use 
of  additional  products.  The  discoveries  of  science  are 
constantly  making  things  useful  that  were  formerly  use- 
less, and  are  thereby  enlarging  the  field  of  business 
activities. 


COMMUNITY  ECONOMICS  9 

We  seldom  think  of  the  processes  by  which  we  are 
supplied  with  food,  clothing,  shelter,  and  the  comforts  of 
life,  until  they  break  down  at  some  point  and  we  are 
deprived  of  certain  things  that  we  need  or  want.  We 
seldom  think  of  our  dependence  upon  transportation  until 
floods,  strikes,  or  bad  service  stop  the  flow  of  goods. 
We  seldom  think  of  the  dependence  of  the  city  upon  the 
country,  and  of  the  country  upon  the  city,  until  production 
or  transportation  of  some  important  article  fails.  We 
seldom  think  of  our  dependence  upon  each  other  and  upon 
other  comnumities  or  countries,  and  of  their  dependence 
upon  us,  until  we  are  deprived  of  some  necessity  or  com- 
fort of  life,  thus  forcing  it  upon  our  attention.  Yet  we 
grow  more  and  more  dependent  upon  one  another  for  the 
supply  of  the  things  needed  for  our  daily  use,  comfort 
and  enjoyment. 

EconoDiics  Defined 

The  system  by  which  goods  are  produced  and  exchanged 
to  meet  the  varied  wants  of  all  people  is  the  subject- 
matter  of  economics.  If  each  person  produced  all  he 
used,  there  would  be  no  special  value  in  this  study.  It 
is  because  specialization  of  production  and  distribution 
creates  an  extensive  and  complicated  system  that  the  study 
of  economics  becomes  important.  The  more  minutely 
specialization  is  developed,  the  more  complicated  the 
system  becomes,  because  thereby  each  person  becomes 
more  dependent  upon  the  perfect  working  of  the  whole 
system.  When  a  person  produces  none  of  the  goods  he 
consumes,  it  naturally  follows  that  he  depends  entirely 
on  the  process  of  exchange  for  his  livelihood. 


lo        ECONOMICS  AND  THE  COMMUNITY 

Everyone  should  have  an  interest  in  economics,  because 
the  subject  concerns  the  Hvelihood  and  comfort  of  every- 
one. It  is  important  to  the  individual  to  understand  the 
economic  system,  because  each  person  makes  decisions 
constantly  on  economic  questions  which  may  affect  his 
own  or  his  country's  welfare.  Everybody  is  an  economist 
in  one  way  or  another,  although  he  may  be  unconscious 
of  the  fact. 

Economics  may  be  defined  as  the  subject  that  deals  with 
all  of  the  activities  of  men  in  satisfying  their  needs  and 
wants.  It  deals  with  the  processes  by  which  people  pro- 
duce and  distribute  goods  to  meet  the  needs  of  consumers. 
It  deals  also  with  the  services  that  are  performed  to  satisfy 
needs  and  wants.  Everything  that  relates  to  or  results 
from  the  carrying  on  of  business,  including  those  things 
that  help  or  hinder  the  process,  is  within  the  field  of 
economics. 

The  Subject-Matter  of  Economics 

What  are  the  activities  that  relate  to  or  result  from 
the  production  and  distribution  of  goods  to  meet  human 
wants,  and  that  are  therefore  included  in  economics? 
We  naturally  think  first  of  the  actual  work  of  production 
of  goods  on,  farms  and  in  factories,  forests  and  mines. 
Next  we  think  of  the  necessary  means  for  transportation 
by  highway,  railroad,  water,  or  air,  and  the  means  for 
care  and  storage.  We  observe  everywhere  the  business 
of  buying  and  selling  goods  at  wholesale  and  retail.  We 
recognize  the  need  for  money  to  make  exchanges,  and 
also  the  importance  of  having  sound  money  of  staple 
value  to  avoid  loss  and  confusion. 


COMMUNITY  ECONOMICS  ii 

When  we  look  into  the  processes  of  business  further, 
we  see  the  place  that  banks  occupy  in  creating  credit  and 
lending  money  to  carry  on  production  and  distribution, 
and  in  transmitting  money  from  place  to  place.  We  see 
also  the  importance  of  banks  and  other  institutions  in 
bringing  together  the  i)eople's  savings  in  order  that  they 
may  be  safeguarded  and  used  to  finance  business  activities. 
Insurance  of  all  kinds,  by  protecting  business  against  the 
risk  of  sudden  calamities,  promotes  stability  and  safety 
for  the  business  man. 

Most  important  of  all  in  economics  is  the  study  of  the 
way  in  which  the  income  from  production  and  distribution 
is  divided  among  those  who  take  part  in  the  making  and 
distribution  of  goods  among  the  employees,  workers, 
managers,  landowners,  and  capitalists. 

Control  of  Economic  Evils 
What  evils  resulting  from  the  economic  processes  are 
we  bound,  in  fairness  to  all  the  people,  to  prevent?  First, 
there  is  the  necessity  of  preventing  greedy  men  from 
controlling  necessary  goods  and  extorting  unfair  prices. 
Monopoly  of  products  or  raw  materials  is  condemned  by 
fair-minded  men,  and  is  generally  prohibited  or  regulated 
by  law.  Profiteering — meaning  the  charging  of  unfair 
prices — is  also  universally  condemned.  All  citizens  desire 
that  the  process  of  supplying  the  people's  wants  should 
work  for  the  benefit  of  all  without  selfish  control  or 
advantage. 

The  Citiccn's  Interest  in  EconoDtics 
The  people  are  interested  in  the  freest  and  most  efficient 
exchange  of  goods,  and  to  that  end  they  promote  better 


12        ECONOMICS  AND  THE  COMMUNITY 

means  of  transportation  and  lietter  systems  of  buying  and 
selling  goods,  particularly  by  bringing  producers  and  con- 
sumers closer  together.  Since  the  good  of  all  is  the  ideal 
of  democracy,  the  citizen  as  an  economist  is  especially 
desirous  that  the  natural  resources  of  the  country  shall 
not  be  wasted  for  the  selfish  advantage  of  a  few.  Con- 
servation of  mines,  forests,  and  soils,  and  of  the  health 
of  human  beings  as  well,  is  of  concern  to  all.  The  pro- 
motion of  efficiency  of  production  and  consumption  to 
prevent  waste,  and  to  make  the  most  of  what  we  have, 
is  a  matter  of  special  interest  to  the  citizen. 

The  citizen  as  an  economist  is  also  interested  in  the 
community  control  and  regulation  of  business  for  the 
public  welfare.  He  is  interested  in  seeing  that  the  people 
are  protected,  and,  at  the  same  time,  that  business  activ- 
ities are  not  unduly  hampered  l)y  unjust  regulations. 
Taxation  is  especially  important  to  him,  because  if  taxes 
are  not  imposed  with  scientific  care  and  fairness,  they  may 
not  only  harm  individuals  but  may  seriously  hamper 
the  processes  of  business  and  may  even  destroy  busi- 
ness activities.  "The  power  to  tax  is  tlie  power  to  de- 
stroy," and  therefore  it  should  be  exercised  with  great 
care. 

In  short,  the  citizen  as  an  economist  seeks  the  assurance 
that  the  processes  of  business  by  which  the  wants  of  all 
the  people  are  supplied  shall  go  on  at  their  fullest  efficiency 
for  the  benefit  of  all,  and  shall  be  as  free  as  possible  from 
selfish  control.  We  all  desire  that  the  economic  agencies 
that  produce  and  distribute  goods,  or  that  aid  in  the 
process,  shall  be  conducted  for  the  benefit  of  all. 


COMMUNITY  ECONOMICS  13 

Economics  and  the  Community 

Economics  in  its  community  or  social  aspects  deals  with 
the  economic  processes  of  production  and  distribution  of 
the  fruits  thereof  among  the  agencies  of  production,  as 
those  processes  are  controlled  or  regulated  by  the  com- 
munity for  the  benefit  of  all.  The  community  is  con- 
cerned in  guarding  the  people's  welfare  through  measures 
that  promote  good  and  restrain  evil  in  the  processes  that 
provide  for  liuman  wants. 

We  are  concerned,  in  the  study  of  economics,  with  the 
needs  of  the  people  of  the  community  and  their  fulfilment, 
because  the  welfare  of  the  people  is  the  first  consideration. 
Since  all  of  the  i)eo])le  are  consumers,  the  consumer  is 
entitled  to  first  place  in  our  concern.  Production  is  for 
the  purpose  of  consumption  and  not  for  the  selfish  advan- 
tage of  the  producer.  We  encourage  production  of  neces- 
sities in  order  to  benefit  the  consumer.  We  discourage 
production  of  luxuries  at  times,  in  order  not  to  interfere 
with  the  production  of  necessities.  We  encourage  efforts 
tQ  get  goods  from  the  producer  to  the  consumer  more 
economically  in  order  to  supply  better  the  needs  of  the 
consumer.  We  are  concerned,  first  and  foremost,  with 
the  consumer's  essential  needs,  because  we  are  all  con- 
sumers and  we  seek  the  greatest  good  to  the  greatest 
number. 

The  following  examples  will  illustrate  more  fully  the 
place  of  the  community  in  economic  activities : 

(i.)    The  economic  processes  of  business,  if  uncon- 


14        ECONOMICS  AND  THE  COMMUNITY 

trolled,  might  place  a  necessity  of  life  in  the  hands  of  one 
man  or  group  of  men,  who  would  be  able  thus  to  oppress 
others.  In  such  cases  the  community  properly  acts  to 
curb  the  power  of  the  monopolist. 

(2.)  The  farmer  may  exhaust  the  soil  or  the  miner 
may  waste  coal  for  immediate  profits ;  but  the  community 
is  interested  in  saving  such  resources  and  in  the  conserva- 
tion of  productivity. 

(3.)  Railroads  might  charge  excessive  rates  and  there- 
by hinder  the  transportation  of  goods  that  the  consumers 
need.  The  community  is  interested  in  fixing  the  rate  at 
a  just  and  reasonable  amount  in  order  to  promote  trans- 
portation for  the  benefit  of  all  consumers. 

(4.)  Banks  or  insurance  companies  or  corporations 
might  be  run  for  the  benefit  of  the  few  who  control  them; 
but  the  community  steps  in  and  regulates  their  conduct 
for  the  benefit  of  all. 

Such  examples  might  be  multiplied  to  show  how  the 
purely  economic  processes  of  producing,  transporting,  and 
selling  goods  are  regulated  by  the  community  to  protect 
and  promote  the  interests  of  the  people. 

It  is  plain  to  any  observer  that  the  principal  business  of 
men  consists  in  producing  and  distributing  goods  to  pro- 
vide the  means  of  supplying  their  own  needs.  The  process 
of  getting  goods  to  the  consumer  with  the  greatest  effi- 
ciency is  the  problem  that  most  vitally  concerns  all.  The 
most  difficult  questions  that  confront  the  people  are  eco- 
nomic questions  growing  out  of  the  process  of  providing 
for  the  needs  of  the  people.  These  questions  must  be 
understood  by  all  people  in  order  that  the  laws  that  are 


COMMUNITY  ECONOMICS  15 

passed  and  the  actions  that  are  taken  may  be   for  the 
pubHc  benefit. 

In  the  study  of  economics  and  the  community  we  shall 
follow  the  production  and  distribution  of  goods  and 
learn  about  the  agencies  that  carry  on  the  world's  work. 
We  shall  see  how  the  people  act  together  in  local  com- 
munity, state,  and  nation  to  facilitate  the  processes  of 
business  and  to  check  those  practices  that  in  any  harmful 
way  affect  the  interests  of  the  people. 

Questions  and  Problems 

1.  Name  different  reasons  for  people  selecting  the  occu- 

pation in  which  they  work. 

2.  Make  a  complete  catalogue  of  the  products  used  in  the 

construction  of  your  school  building  and  the  sources 
of  supply. 

3.  Make  a  catalogue  of  the  principal  food-stuffs  displayed 

in  a  grocery  store  and  give  the  sources  of  supply. 

4.  Describe  the  dependence  upon  other  cities,  states  and 

countries  for  these  products. 

5.  From    any    standard    physical    geography    or    similar 

sources  make  a  list  of  the  principal  countries  upon 
which  we  rely  for  important  articles. 

6.  What  are  the  advantages  and  disadvantages  of  supply- 

ing one's  self  or  of  dividing  labor  and  depending 
upon  others  ? 

7.  What   are  the   advantages   and   disadvantages   in   the 

specialization    of    production   by    communities    and 
countries  ? 

8.  Is  our  dependence  upon  others  for  the  goods  we  want 

likely  to  increase  or  to  decrease  in  the  future? 

References 

Clay,  Economics  for  the  General  Reader,  Chapters  i 
and  2. 


CHAPTER  II 

CONSUMPTION 

Community  Survey 

1.  Make  a  list  of  all  goods  consumed  in  your  community. 

2.  Make  a  list  of  what  you  consider  necessaries  of  life. 

3.  Make  a  list  of  what  you  consider  comforts  of  life. 

4.  Make  a  list  of  what  you  consider  luxuries  of  life. 

The  subject  of  consumption  is  dealt  with  first  in  eco- 
nomics because  consumption  is  the  beginning  of  the 
process  that  results  in  the  production  and  distribution  of 
goods  and  in  the  furnishing  of  services.  It  is  because 
people  want  goods  and  services  that  production  and  dis- 
tribution are  carried  on  and  services  are  performed.  If 
men  did  not  want  shoes  there  would  be  no  shoes  pro- 
duced, nor  products  used  exclusively  in  making  shoes,  nor 
machinery  for  the  production  of  shoes.  If  men  wanted 
some  available  substitute  for  leather  shoes,  production  of 
the  substitute  would  follow.  If  men  wore  long  hair  and 
beard,  there  would  be  no  need  for  the  services  of  the 
barber,  nor  for  the  production  of  barbers'  tools  or  equip- 
ment. The  great  variety  of  needs  and  wants  of  millions 
of  people  call  for  a  great  variety  of  products  and  services, 
and  induce  people  to  engage  in  the  production  of  goods 

and  the  furnishing  of  services. 

16 


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i8        ECONOMICS  AND  THE  COMMUNITY 
Kinds  of  IV ants 

The  wants  of  people  may  be  classified  into  essentials 
and  non-essentials,  according  as  they  are  necessary  or  not 
for  comfortable  living.  Wants  may  be  classified  also 
into  necessaries,  comforts,  and  luxuries.  Food,  clothing, 
fuel,  and  shelter,  sufficient  to  sustain  and  protect  life,  are 
essentials  or  necessaries.  Most  people  would  also  include 
many  of  the  ordinary  comforts  of  life  among  the  essen- 
tials. For  example :  one  could  live  without  sugar  except 
such  as  nature  supplies  in  raw  foods,  but  few  persons  will 
do  so  if  sugar  is  to  be  had.  Nearly  all  people  would 
count  it  a  real  hardship  to  go  without  a  liberal  supply 
of  sugar.  Education  is  not  essential  to  existence,  but  it 
is  necessary  in  modern  civilized  life;  hence  all  equipment 
and  work  connected  with  education  are  essentials.  Lux- 
uries or  non-essentials,  such  as  diamonds,  silks,  and  many 
forms  of  personal  service,  are  those  that  are  not  needed 
for  comfortable  living. 

A  little  thought  will  show  that  necessities,  comforts, 
and  luxuries  overlap  one  another.  No  one  can  tell  exactly 
where  each  begins.  It  is  comparatively  easy,  however, 
to  classify  most  of  the  important  needs,  such  as  food, 
clothing,  shelter,  and  fuel.  The  governments  of  the 
nations  at  war  were  forced  to  make  such  classifications 
when  pressed  to  produce  the  essentials  of  life  in  war-time 
without  waste  of  material  or  eflFort.  Some  kinds  of  pro- 
duction were  stopped  entirely,  while  others  were  given 
special  aid  and  encouragement.  Everyone  could  see 
plainly  that  diamonds  should  not  be  produced  when  men 
were  needed   to  grow   wheat  or  make  clothing,   to   say 


CONSUMPTION  19 

nothing  of  the  manufacture  of  guns  and  ammunition. 
Many  of  the  countries  of  Europe  will  probably  find  it 
necessary  to  center  attention  for  years  upon  the  production 
of  the  most  important  necessaries  of  life,  to  the  exclusion 
of  luxuries  and  of  many  of  the  comforts  of  life.  The 
United  States  will  probably  find  that  it  is  at  least  desirable 
to  encourage  production  of  necessities  in  order  to  meet 
the  most  pressing  needs  of  the  people. 

Partial  and  Complete  Consumption 

Consumption  of  goods  may  be  complete,  as  w4ien  food 
is  consumed  or  coal  is  burned.  Consumption  may  also 
be  for  further  production,  as  when  iron  is  used  in  the 
manufacture  of  steel,  or  when  steel  is  used  in  the 
manufacture  of  rails  or  agricultural  implements.  The 
term  "consumer"  is  broader,  therefore,  than  is  usually 
understood.  It  means  not  merely  the  person  who  uses 
food  and  clothing,  but  also  the  producer  who  uses  raw 
material  to  produce  goods. 

Every  person  who  buys  goods,  either  for  complete 
consumption  or  to  use  in  further  production,  is  a  con- 
sumer of  those  goods.  The  one  who  actually  uses  the 
final  product  for  which  the  w^hole  economic  process  is 
carried  on  is  called  the  "ultimate  consumer."  The  user 
of  bread  is  the  ultimate  consumer  of  the  products  and 
service  of  the  wheat-grower,  miller,  baker,  and  distributor, 
as  well  as  the  manufacturer  of  machinery  used  in  farming, 
milling,  baking  or  transportation. 

The  farmer  is  the  consumer  of  agricultural  machinery, 
in  the  manufacture  of  \\liicli  there  were  several  steps, 
namely,   the   making   and    assembling   of   tb.c    parts,    the 


20        ECONOMICS  AND  THE  COMMUNITY 

mamifactiire  of  steel  from  iron,  the  manufacture  of  iron 
from  ore,  and  the  mining  of  the  ore  itself.  The  manu- 
facturer is  a  consumer  of  the  machinery  that  he  requires 
in  the  making  of  his  product.  But  the  ultimate  consumer 
is  the  one  who  starts  the  whole  process  of  consumption. 
His  demand  for  goods  for  his  own  use  and  satisfaction 
requires  not  only  the  direct  production  of  those  goods 
but  also  of  all  of  the  materials  and  equipment  needed  to 
produce  goods  in  the  form  wanted. 

The  Ramifications  of  Consumers'  Needs 

Simple  examples  drawn  from  everyday  life  will  show 
the  ramifications  of  demands  for  goods  to  supply  human 
wants.  Such  examples  will  indicate  the  world-wide 
stimulus  to  production  caused  by  the  demands  for  goods. 
Take  the  example  of  our  demand  for  bread.  This  de- 
mand makes  necessary  the  work  of  the  miller,  farmer, 
baker,  transporter,  and  manufacturer.  The  baker  needs 
machinery  and  utensils.  The  miller  needs  extensive 
equipment  for  the  grinding  of  grain  and  the  milling  of 
flour.  The  farmer  needs  farm  implements  of  many 
varieties.  Transportation  agencies  need  road-beds,  tracks, 
vehicles,  and  power.  The  manufacturers  require  vast 
amounts  of  machinery  to  supply  the  needs  of  the  miller, 
farmer,  baker,  and  transporter,  and  of  those  who  supply 
other  necessary  products  that  go  to  the  making  of  bread. 
The  manufacture  of  machinery  and  apparatus  requires 
innumerable  products  from  mines  and  forests,  the  getting 
of  which  in  turn  creates  demands  for  other  goods.  The 
remotest  parts  of  the  earth  are  called  upon  to  supply  some 


CONSUMPTION 


21 


of  the  things  that  go  to  pro(kice  bread.  The  same  story 
may  be  told  of  other  necessary  food-stuffs,  clothing,  and 
building  materials.  To  supply  each  causes  wide  ramifica- 
tion of  demands. 

Perhaps  the  idea  can  l)e  more  readily  grasped  by  an 
example  of  the  demand  for  a  new  product,  such  as  the 
automobile.     The  automobile  industry  has  developed  to 


:^^';^lvt| 


Rubber  plantation 


enormous  size  in  a  few  years.  A  new  chain  of  demands 
was  set  up  by  the  growth  of  this  industry.  What  were 
the  products  that  were  called  for  by  the  demand  for 
automobiles?  Rubber  was  needed  in  large  quantities. 
Into  the  remote  regions  of  the  trojiics,  organizers  and 
workmen  went  to  develop  rubber  production.  This  in 
turn  required  machinery  for  producing  and  manufacturing 


2.2         ECONOMICS  AND  THE  COMMUNITY 

riihl)er,  as  well  as  means  for  transportation,  including 
railroads  and  steamships.  These  demands  in  turn  in- 
creased the  demand  for  iron  and  wood  products  in  endless 
succession.     Other  products  specially  needed  for  the  auto- 


Picking  cotton 

moljilc  were  nickel,  coi)i)er,  platinum,  leather,  oil,  and 
gasoline.  Each  need  set  in  motion  a  new  chain  of  de- 
mands, which  reached  around  the  world.  Activity  was 
stimulated  in  many  directions  by  the  demand  for  auto- 
mobiles. Coniinuniiics  that  possessed  raw  materials  or 
where  manufacturing  of  automobiles  was  started  were 
changed  into  flourishing  industrial  centers.  New  occupa- 
tions connected  with  the  manufacture,  repair  and  opera- 


CONSUMPTION  23 

tion  of  cars  came  into  being,  thus  creating  new  sources 
of  demand  for  services  and  for  other  goods. 

The  same  story  could  l)c  rei)eate(l  in  respect  to  the 
motion-i)icturc  Inisiness,  the  electrical  business,  the  talking- 
machine  and  numerous  other  industries  that  have  sprung 
up  in  recent  years.  The  ramification  of  demands  spread- 
ing out  from  these  industries  stimulated  activities  every- 
where, and  the  process  of  expansion  continues  endlessly. 
Every  new  invention  or  scientific  discovery  creates  new 
needs,  which  men  in  all  parts  of  the  world  supply. 

Couimiuiity  Consumption 

The  people  in  organized  communities  have  needs  in 
common  which  create  large  demands  for  goods.  Town- 
ships, counties,  cities,  states,  and  the  nation  all  perform 
certain  functions  for  the  people  that  require  large  supplies 
of  materials.  They  also  require  the  service  of  individuals 
in  great  numl^ers.  Fully  two  per  cent  of  the  people  of 
the  United  States  are  engaged  in  public  work  for  a  part 
or  all  of  their  time,  in  the  effort  to  supply  community 
needs.  At  present  more  than  six  billion  dollars  are  spent 
annually  in  supplying  the  needs  of  local,  state  and  national 
governments. 

An  analysis  of  public  or  community  needs  for  materials 
shows  how  important  are  the  collective  demands  of  the 
people  upon  production.  In  recent  times  the  need  for  war 
materials  overshadowed  all  other  needs.  Thousands  of 
industries  devoted  their  whole  time  to  the  supplying  of 
the  collective  needs  of  the  people  for  military  supplies. 
The  need  for  public  buildings,  and  the  materials  and 
equipment  that  go  into  them,  the  building  of  harbors  and 


24        ECONOMICS  AND  THE  COMMUNITY 

clocks,  the  dredging  of  rivers,  and  the  building  of  canals 
make  important  demands  on  the  output  of  productive 
enterprises.  Highway,  street,  and  bridge  construction 
and  maintenance  call  for  enormous  supi)lies  of  materials 
and  machinery.  Education  calls  for  large  amounts  of 
material  products  to  provide  the  necessary  buildings, 
books,  and  equipment.  Drainage,  irrigation,  parks,  play- 
grounds, and  hospitals  require  large  supplies  of  many 
l^roducts.  The  collective  demand  for  goods  to  supply 
l)ul)lic  needs  has  the  same  economic  efifect  upon  production 
as  if  they  were  individual  wants.  Production  responds 
to  meet  all  of  the  needs  of  people,  whether  expressed 
individually  or  by  community  action. 

TJw  Demand  for  Services 

In  addition  to  material  goods,  people  have  wants  for 
services  of  various  kinds.  These  wants  encourage  people 
to  engage  in  occui)ations  to  supply  them.  Nearly  every- 
body has  need  of  the  professional  services  of  physicians, 
nurses,  lawyers,  and  dentists.  Many  people  use  the  serv- 
ices of  barbers,  chauffeurs,  waiters,  and  housemaids.  The 
people  as  a  whole  or  in  groups  require  churches,  schools, 
lil)raries,  and  play-grounds,  each  requiring  professional 
and  i>ersonal  services.  The  need  for  professional  and 
I)ersonal  services  creates  additional  demands.  Schools 
require  Iniildings,  Ixjoks,  charts,  desks,  blackboards,  and 
stationery.  Churches,  libraries,  and  play-grounds  recjuire 
large  equipment  calling  for  many  products. 

Artists  and  musicians  and  the  love  of  art  and  music 
create  demands  for  a  number  of  products,  such  as  musical 
instruments,  sheet  music,  painters'  and  sculptors'  materials 


CONSUMPTION 


25 


and  equipment,  besides  the  erection  of  music-halls  and 
art  galleries. 

It  would  he  hard  to  find  a  single  activity  in  the  whole 
range  of  life  that  did  not  directly  create  the  need  for 
products  and  services  and  that  did  not  consequently 
stimulate  economic  activity. 


How  tlie  people  spent  their  money  in  1900-1902  and  in  1918-1919 


Essential  and  N on-Essential  Goods 

All  activities  and  wants,  whether  essential  or  non- 
essential, stimulate  the  productive  process.  The  demand 
for  luxuries  causes  men  to  produce  luxuries,  just  as  the 
demand  for  necessities  causes  people  to  engage  in  the 
l)roduction  of  necessities.  Men  engage  in  occupations 
that  will  give  them  the  largest  economic  return,  whether 
the  occupation  be  the  production  of  food-stufifs,  the  manu- 
facture of  automobiles,  or  the  cutting  of  diamonds.  The 
bulk  of  the  wants  of  the  people  are,  how^ever,  for  the 
necessities   of   life,   including  those   comforts  and  satis- 


26         ECONOMICS  AND  THE  COMMUNITY 

factions  of  life  which  people  have  come  to  consider  as 
necessities. 

Fully  three  fourths  of  the  entire  income  of  all  the 
people  of  the  United  States  is  spent  for  food,  clothing, 
and  shelter.  A  great  part  of  the  remaining  expenditures 
goes  for  other  products  and  activities  that  are  considered 
essentials,  such  as  religion,  education,  and  recreation. 
Only  a  comparatively  small  jxjrtion  of  the  total  income 
of  all  of  the  people  is  spent  for  the  purchase  of  luxuries, 
such  as  diamonds  and  silks,  or  for  uneconomic  goods, 
such  as  liquors,  chewing-gum,  and  habit- forming  drugs. 

It  is  for  the  direct  benefit  of  all  of  the  people  that 
production  of  essential  things  should  be  promoted,  so 
that  people  may  be  suj^jplied  as  readily  and  economically 
as  possible  with  the  first  essentials  of  comfortable  living. 
The  people  are  not  greatly  concerned,  from  an  economic 
viewpoint,  w'ith  the  ])roduction  of  non-essential  goods, 
except  when  such  production  draws  labor  and  materials 
away  from  the  production  of  essential  goods  to  such  an 
extent  as  to  curtail  the  production  of  the  things  that  the 
I>eople  need  most.  If  the  majority  of  the  people  should 
cease  to  produce  food  and  clothing  and  should  engage  in 
hunting  gold  or  diamonds,  we  should  soon  1^  reduced  to 
dire  distress. 

There  is  generally  a  recognition  of  the  advisability  of 
prohibiting  the  use  of  goods  that  are  harmful  to  human 
Ixrings.  Such  drugs  as  opium  and  alcohol  are,  therefore, 
l>rohibited.  The  sale  of  other  products  is  restricted,  as 
for  example  the  sale  of  cigarettes  to  children.  The  sale 
of  luxuries  is  generally  allowed  to  go  on,  but  special  taxes 


CONSUMPTION  27 

are  often  levied  to  discourage  sales  as  well  as  to  secure 
governmental  revenue.  It  is  clearly  recognized  that 
luxuries  should  not  be  produced  at  the  expense  of  the 
production  of  essentials.  During  the  war  this  principle 
was  put  into  widespread  practice  in  America  and  Europe. 
In  1920  the  Federal  Reserve  Board,  which  has  general 
control  of  the  banking  system  of  the  United  States,  began 
a  movement  among  bankers  to  cut  down  bank  loans  to 
producers  of  non-essentials,  in  order  that  capital  and 
labor  might  be  more  freely  available  to  supply  the  neces- 
sities of  life. 

The  wants  of  consumers  are  constantly  increasing. 
This  is  caused  by  the  growth  of  science  and  invention  and 
the  consequent  creation  of  new  products,  the  wider  educa- 
tion and  experience  of  consumers,  and  the  creation  of 
wants  by  means  of  solicitation  and  advertising.  The 
wants  supplied  to-day  in  the  family  of  the  poorest  work- 
man contain  many  products  that  a  century  ago  even  kings 
could  not  enjoy.  Sugar  is  a  good  example.  A  century 
ago  the  average  consumption  of  sugar  was  less  than  seven 
pounds  per  person  per  year  for  all  purposes.  Few  people 
used  sugar.  To-day  the  average  consumption  is  between 
ninety  and  one  hundred  pounds  i)er  person  per  year,  and 
the  use  of  sugar  is  universal.  We  have  learned  many 
new  uses  for  sugar,  l)esides  increasing  its  use  in  old  ways. 

The  standard  of  living  is  constantly  improving  and 
enlarging,  and  the  process  will  undoubtedly  go  on  as  fast 
as  science  and  invention  are  able  to  produce  additional  and 
desirable  products  within  the  reach  of  man.  The  power 
of  salesmanship  and  advertising  to   enlarge  and   create 


28        ECONOMICS  AND  THE  COMMUNITY 

desires  is  well  understood.  By  these  means  people's  at- 
tention is  called  to  certain  products,  and  their  consumption 
is  thereby  encouraged.     Advertisers  stimulate  and  edu- 


The  education  of  consumers.    A  domestic  science  class 


cate  the  people  in  the  use  of  goods.  They  make  a  market 
in  people's  desires  for  new  goods,  and  they  also  keep 
attention  focused  on  well-known  products.  If  it  were 
not  for  advertising  and  salesmanship,  people's  desires 
would  change  but  slowly.  Styles  would  remain  constant 
for  many  years.  Advertising  makes  knowledge  of 
products  universal  and  creates  desires  which  express  them- 
selves in  demands  for  goods. 


CONSUMPTION  29 

Education  of  the  Consumer 

The  consumer's  knowledge  of  products  and  his  desires 
for  them  are  constantly  expanding,  but  his  demands  are 
limited  by  his  ability  to  purchase.  The  consumer's  in- 
come determines  the  amount  that  he  may  purchase.  Any- 
thing that  enables  the  consumer  to  conserve  in  one  direc- 
tion allows  him  to  expand  in  another.  The  education  of 
the  consumer  in  the  prevention  of  waste  and  in  the  eco- 
nomic  use   of   goods   enlarges   his   capacity   to   purchase 


Training  teachers  of  donu'stic  science,  Columbia  University 

products.  The  education  of  the  consumer  in  the  wise 
use  of  food  and  clothing  generally  prevents  nmch  waste 
and  enables  him  to  apply  the  savings  to  other  purchases. 


30         ECONOMICS  AND  THE  COMMUNITY 

Tlie  education  of  the  housekeeper  makes  possible  the 
fuller  use  of  products  and  the  supplying  of  additional 
wants.  The  education  of  the  consumer  as  a  i)urchaser 
enables  him  to  purchase  more  effectively,  and  conse- 
quently to  supply  a  wider  range  of  wants  and  provide 
for  future  needs.  It  is  of  direct  economic  value,  there- 
fore, that  schools  should  teach  rational  consumption 
through  practical  courses  in  the  selection  and  use  of 
food,  clothing,  shelter,  and  other  essential  goods. 

Questions  and  Problems 

1.  Why  are  we  concerned  in  ec(jnomics  first  of  all  with 

the  wants  of  people? 

2.  What  are  the  necessaries  of  life? 

3.  What  are  the  comforts  of  life? 

4.  What  are  the  luxuries  of  life? 

5.  What  part  of  the  wage-earner's  income  is  spent  upon 

necessaries?     Comforts?     Luxuries? 

6.  W'hy  should  we  be  specially  concerned  about  making 

it  easier  to  secure  the  necessaries  and  comforts  of 
life? 

7.  Is  there  any  reason  why  we  siiould  promote  the  pro- 

duction of  the  luxuries  of  life? 

8.  Is  there  any  difference  between  necessaries  and  luxuries 

in  the  effect  of  wants  upon  production? 

9.  Is  it  ever  proper  to  discourage  or  actually  ])rf»hibit  the 

I^roduction  of  luxuries? 

10.  What  is  the  effect  of  the  growth  of  science  and  inven- 

tion upon  the  wants  of  the  people?     Give  examples. 

1 1 .  What  are  community  wants  and  how  do  they  affect 

production?     Name  twenty  community  wants. 

12.  Discuss  the  merits  of  advertising  in  its  results  in  stimu- 

lating the  use  of  goods. 

13.  .Show  the  way  wants  cause  other  wants  in  an  endless 

chain. 

14.  What  goods  are  totally  consumed  in   the  process  of 


CONSUMPTION  31 

consumption,  and  what  goods  are  merely  changed 
in  form  ? 
15.  Trace  the  demand  for  goods  produced  by  the  demand 
for  automobiles,  motion  pictures,  electrical  supplies, 
farm  machinery,  bananas,  wool  clothing,  cotton 
clothing. 

References 
Clay,  Economics  for  the  General  Reader. 


CHAPTER  III 

PRODUCTION 

Coiiu)ii(n{ty  Survey 

Make  a  complete  survey  of  the  community  to  determine  the 
kinds  of  production,  the  processes  of  manufacture,  the 
kinds  of  power  used ;  the  importance  of  the  various 
products ;  and  the  number  of  men  engaged  in  different 
occupations. 

Production  consists  in  the  preparation  of  goods  in 
such  form  that  they  will  satisfy  human  wants.  Nature 
produces  some  goods  entirely  unaided,  such  as  wild  fruit 
and  nuts.  Nature  guided  by  man  produces  many  things, 
such  as  agricultural  products.  Nature  produces  vast 
stores  of  minerals,  wdiich  man  secures  by  his  own  efforts 
in  mining.  Man  takes  the  raw  materials  from  nature 
and  shapes  them  into  useful  products,  or  he  may  take 
the  partially  formed  products  and  shape  them  into  other 
and  more  usable  forms.  Iron  ore  is  produced  by  min- 
ing. Crude  iron  is  i)roduced  from  the  ore  by  smelting. 
Steel  is  a  finer  product  of  iron  made  by  special  processes, 
and  steel  is  used  in  making  scores  of  other  products, 

Kach  of  these  jjrocesses  is  included  in  the  term  "pro- 
duction." Production  consists  in  giving  utility  or  use- 
fulness to  goods  in  the  eyes  of  the  consumer.  The  pro- 
ducer may  create  goods  that  the  consumer  wants,  and 

.32 


PRODUCTION  33 

thus  give  form-utility.  He  may  distribute  goods  to  the 
place  where  the  consumer  wants  them,  thus  giving  place- 
utiHty.  He  may  store  and  preserve  goods  until  such 
time  as  the  consumer  wants  them,  and  thus  give  time- 
utility.  All  these  processes  are  included  in  production. 
For  convenience  and  clearness,  the  distribution  of  goods 
is  discussed  in  the  next  chapter. 

Production  responds  to  the  wants  of  the  consumer. 
The  known  wants  of  the  consumer  for  food  causes  men 
to  engage  in  agriculture  to  produce  food-stufifs.  The 
wants  of  the  farmer  for  tools  and  equipment  cause  men 
to  engage  in  the  manufacture  of  farm  inplements.  The 
wants  of  the  manufacturer  for  steel  and  wood  cause  men 
to  engage  in  steel  production  and  lumbering.  The  wants 
of  the  manufacturer  for  fuel  cause  men  to  engage  in 
coal-mining.  And  so  on  through  the  infinite  demands 
created  by  the  original  wants  of  the  consumer  for  food- 
stuffs. 

Production  Anticipates  JVants 

Production  does  not  wait  until  the  wants  for  goods 
are  made  known.  The  farmer  anticipates  the  wants  for 
food-stuffs  and  grows  his  crops  in  advance  of  demand. 
The  manufacturer,  the  producer  of  steel,  coal,  and  lum- 
l>er,  anticipates  the  wants  of  the  consumer  for  their  prod- 
ucts and  prcKluce  their  goods  in  advance.  Production 
responds  to  the  expected  wants  as  well  as  to  the  actual 
wants  expressed  in  orders  for  goods.  The  producer, 
from  the  experiences  of  past  years,  measures  the  probable 
needs  of  the  future  and  attempts  to  provide  for  them  in 
advance. 


34         KCONOMICS  AND  THE  COMMUNITY 

Producers  also  create  wants  for  goods  in  the  mind  of 
the  consumer.  The  producer  of  a  new  article  anticipates 
that  a  demand  will  be  created  for  it  when  its  merits  are 
known.  A  new  breakfast  food  or  a  new  style  of  hat 
may  l3e  produced  at  the  risk  of  being  wanted  by  the  con- 
sumer. When  it  is  once  on  the  market  and  the  probable 
demand  for  it  has  been  measured,  the  volume  of  its  future 
production  can  1>e  more  readily  determined. 

Advertising 

The  producers  also  stimulate  wants  for  goods  by  adver- 
tising. They  do  not  wait  for  the  wants  of  consumers 
to  lie  expressed,  but  they  call  attention  by  clever  state- 
ments to  the  merits  of  their  products,  thus  stimulating 
the  consumers'  desires  for  them.  Some  well  known 
products  have  been  made  universally  known  to  consum- 
ers through  the  [XDwer  of  advertising.  A  producer  car- 
ries on  his  advertising  both  by  printed  advertisements 
and  by  salesmen. 

Importance  of  Essential  Goods 

The  great  bulk  of  consumers'  wants  are  fairly  stable 
and  continue  uniformly  year  after  year.  Food,  clothing, 
and  shelter  are  primary  wants  and  take  the  greater  por- 
tion of  the  entire  income  of  the  people.  If  all  other  wants 
were  cut  ofif  except  the  demand  for  these  necessities  of 
life  and  for  the  necessities  that  grow  out  of  their  pro- 
duction, the  total  volume  of  products  would  not  be  great- 
ly decreased.  It  is  important  to  keep  in  mind  that  the 
great  bulk  of  business  is  in  the  production  and  distribu- 
tion of  essential  goods. 


PRODUCTION  35 

Types  of  Production 

Production  may  l)e  classified  as  extractive  industries, 
manufacturing  industries,  and  commercial  industries,  in- 
cluding transportation.  All  production  can  be  readily 
grouped  in  these  divisions. 

Extractive  industries  are  those  that  produce  the  raw 
materials  for  the  purpose  of  consumption  or  manufacture. 


A  source  of   raw  materials 

The  most  important  extractive  industries  are  agriculture, 
forestry,  and  mining.  Agriculture  is  the  creation  of  prod- 
ucts by  the  cultivation  of  the  soil.  Since  most  of  our 
food-stuffs  and  clothing  come  from  the  products  of  the 
soil,  agriculture  vnust  be  considered  as  our  most  impor- 
tant industry.  Mining  is  the  taking  of  the  mineral  sub- 
stances stored  up  in  the  earth  to  produce  the  raw  materials 
for  manufacture.     Forestry  creates  various  products,  in- 


36 


ECONOMICS  AND  THE  COMMUNITY 


eluding  the  raw  materials  for  the  manufacture  of  lum- 
l)er.  paper,  and  rubber. 

Manufacturing  consists   in    taking   the   raw   materials 
produced  by  the  extractive  industries  and  changing  their 


Copper  mining 


form  so  as  to  give  new  use  to  the  i^rfxluct.  Manufactur- 
ing may  Ije  partial  or  complete.  Iron  is  manufactured 
when  the  ore  produced  by  mining  is  smelted.  The  same 
iron  is  further  manufactured  into  steel.  Steel  is  further 
manufactured  into  many  articles  of  commerce.  The 
most  imjjortant  kinds  of  manufacture  are  iron  and  steel 
farm  implements,  automobiles,  machinery,  electrical  de- 
vices, hardware,  drygoods,  food  products,  leather,  chem- 
icals, and  paper. 


PRODUCTION  37 

The  third  cH vision  of  prockiction  inckides  the  activities 
of  buying,  selHng,  and  transjjorting  raw  materials  for 
manufacture,  and  of  selling  and  transporting  the  products 
of  manufactures  to  the  consumers,  together  with  all  of 
the  related  lines  of  business — such  as  banking,  which 
helps  to  finance  the  process  of  distribution,  and  insurance, 
which  safeguards  the  owners  of  property  from  a  calam- 
ity. 

Factors  in  Production 

We  have  seen  that  raw  products  are  first  extracted 
from  nature,  given  new  forms  Ijy  manufacture,  and  dis- 
tributed to  the  consumer.  The  process  of  extraction, 
manufacture,  or  distribution  consists  in  organizing  the 
necessary  factors  to  bring  this  about.  There  are  four 
main  factors  of  production,  namely,  land,  labor,  capital, 
and  management.  It  will  be  necessary  to  establish  a  clear 
idea  of  the  meaning  of  land,  later,  capital,  and  manage- 
ment, because  the  solution  of  many  social  and  economic 
problems  depends  upon  our  understanding  of  the  part 
played  by  each  in  production.    • 

Land 

The  term  "land""  is  intended  to  include  all  of  the  mate- 
rials and  forces  of  nature  above  and  below  the  surface 
of  the  earth.  It  includes  soils  from  which  vegetable  mat- 
ter comes,  minerals,  waters,  and  natural  forces.  These 
materials  and  forces  lie  dormant  until  utilized  by  man. 
Many  of  these  materials  and  forces  lie  undeveloped  until 
science  and  invention  teach  man  how  to  utilize  them.  Sci- 
ence and  invention  are  constantly  discovering  new  uses 

378315 


38         ECONOMICS  AND  THE  COMMUNITY 

for  the  materials  and  forces  of  nature,  as  well  as  improv- 
ing old  ways  of  using  them. 

Labor 
The  term  "labor"'  includes  all  of  the  physical  and  men- 
tal efforts  of  man  applied  in  utilizing  the  materials  and 
forces  that  have  been  described  as  land.  We  sometirnes 
think  of  labor  as  merely  the  manual  or  hand  workers. 
As  a  matter  of  fact,  labor  includes  the  work  of  inventors, 
scientists,  bookkeepers,  and  clerks,  as  well  as  manual 
laborers.  Any  one  who  contributes  the  work  of  brain 
or  hand  to  production  is  included  in  the  term  "labor." 

Cap^ital 
The  term  "capital"  includes  all  of  the  accumulated 
goods  that  have  resulted  from  past  production  and  that 
are  organized  for  further  production  of  goods.  All  of 
the  equipment  of  farm,  shop,  mine,  store,  railroad,  and 
other  agencies  of  production  and  distribution  is  included 
in  the  term  "capital."  It  will  be  seen  that  the  term  is 
broader  than  the  idea  of  money  capital,  held  by  many 
people.  Goods  that  are  included  in  the  term  "land"  may 
become  capital.  Coal  in  the  mine  is  land ;  but  stored 
in  the  bins  of  a  manufacturer  it  becomes  capital.  Iron 
ore  in  the  mine  is  land;  but  transformed  into  iron  or 
steel  it  becomes  capital  in  the  hands  of  a  manufacturer. 

Management 

Management  includes  those  who  bring  together  capital 

and  lalxir  and  organize  them  for  the  extraction  of  raw 

materials  or  the  manufacture  and  distribution  of  goods. 

Management  organizes  land,  labor,  and  capital,  with  a 


PRODUCTION  39 

view  to  the  creation  of  products    from  which   a  profit 
can  be  made. 

Dkision  of  Labor 

We  have  already  seen  that  production  is  carried  on  by 
workers,  each  one  of  whom  is  engaged  in  a  particular  part 
of  the  process.  Some  may  work  in  agricultural  produc- 
tion, some  in  manufacturing,  and  some  in  the  distribution 
of  products.  The  agricultural  workers  are  divided  into 
specialties,  such  as  the  producers  of  grain,  cotton,  tobacco, 
dairy  products,  fruit,  poultry,  and  livestock.  The  work- 
ers in  manufacturing  are  divided  into  many  special  lines 
of  manufacture,  and  in  each  plant  the  men  are  specialized 
to  perform  a  single  operation.  Even  in  a  special  trade, 
such  as  carpentry  or  machine  work,  there  are  scores  of 
subdivisions.  Workers  in  the  distrilnitive  process  are 
likewise  specialized.  There  are  bookkeepers,  clerks, 
salesmen,  laborers,  and  specialists  of  many  types.  The 
United  States  Census  Bureau  lists  several  thousand  dis- 
tinct occupations  in  which  workers  engage. 

The  division  of  labor  described  by  these  examples  is 
the  special  feature  of  the  present  system  of  production. 
Adam  Smith,  the  great  English  economist,  was  one  of  the 
first  to  point  out  this  characteristic  of  production.  Since 
his  time  the  division  of  labor  has  been  infinitely  extended. 
For  many  decades  the  tendency  has  l)een  toward  a  nar- 
rower and  still  narrower  division  of  labor.  Factories 
have  reduced  many  processes  to  mere  routine  by  labor- 
saving  machinery.  The  division  of  labor  has  extended 
so  far  that  many  occupations  have  become  extremely 
monotonous  to  the  worker  and  require  very  little  skill  or 


40 


ECONOMICS  AND  THE  COMMUNITY 


thought  on  his  part.  By  division  of  labor  in  factories  each 
worker  may  become  more  expert  in  the  process  he  is  per- 
forming through  constant  repetition.  At  the  same  time, 
it  requires  greater  skill  in  management  to  keep  all  of 
the  processes  working  efficiently.  The  efifect  of  too  nar- 
row specialization   upon  the   worker   is  to  deprive   him 


©  u.  &  D. 
Shoe  industry.     Heel  fastening  machine  at  work 

of  initiative,  and  consequently  of  interest  in  his  work. 
Specialization  of  work  that  enables  a  person  to  know 
all  about  a  vocation  is  good,  but  specialization  that  makes 
a  worker  merely  a  part  of  a  machine  is  harmful. 

The  Factory  System 

Modern  manufacturing  is  carried  on  principally  in  the 
factory.     Mechanical   devices,   instead  of  human  hands, 


PRODUCTION  41 

are  used  in  many  processes.  Mechanical  power  drives  the 
machinery,  and  tlie  whole  is  guided  and  controlled  by  one 
management. 

The  factory  system  developed  because  of  its  greater  effi- 
ciency over  preceding  systems,  such  as  the  family  and 
handicraft  systems,  which  formerly  flourished.  Science 
and  invention  brought  increased  possibilities  in  the  appli- 
cation of  steam,  water,  and  electric  power,  and  in  the  use 
of  mechanical  devices.  With  a  machine  and  sufficient 
power,  one  man  can  perform  the  work  of  several  handi- 
craftsmen. 

Dependence  on  power  caused  the  concentration  of 
workers  in  factories,  and  the  location  of  factories  near 
sources  of  power  and  labor.  The  growth  of  modern  in- 
dustrial cities  has  resulted  largely  from  the  development 
of  the  factory  system. 

The  problems  of  organization  and  management  of  in- 
dustrial enterprises  have  been  brought  to  the  front  with 
the  growth  of  the  factory  system.  The  factory  requires 
efficient  organization  and  considerable  capital.  There 
must  be  a  continuous  supply  of  raw  materials  and  of 
labor.  The  arrangements  of  the  plant  must  be  made  to 
promote  efficient  handling  of  materials.  Waste  of  time 
and  materials  must  be  prevented.  Workers  must  be  se- 
lected and  trained  for  the  kind  of  work  they  are  able  to 
do  best.  The  entire  factory  must  1)e  organized  so  as  to 
w^ork  smoothly  and  harmoniously  as  a  unit.  The  man- 
agement must  dispose  of  the  product  in  distant  markets, 
and  profit  is  essential  to  enable  the  factory  to  be  run. 


42         ECONOMICS  AND  THE  COMMUNITY 
Large  vs.  Small  Scale  Production 

In  some  lines  of  work  production  on  a  large  scale  is 
found  more  profitable  than  production  on  a  small  scale, 
while  in  other  lines  the  reverse  is  true.  Manufacturing, 
mining,  and  lumbering  are  generally  more  profitable  when 
conducted  on  a  large  scale.  Diversified  farming,  fruit- 
growing, and  dairying  are  usually  more  profitable  when 
conducted  on  a  small  scale.  Large-scale  production  per- 
mits wholesale  purchases  of  materials;  more  efficient 
use  of  power;  finer  subdivision  of  labor ;  greater  special- 
ization of  ability;  employment  of  the  latest  improved 
machinery;  the  disposal  of  the  product  with  fewer  sales- 
men ;  and  fuller  utilization  of  by-products.  On  the  other 
hand,  the  small  producer  is  able  to  exercise  a  personal 
supervision  over  the  whole  industry  which  is  impossible 
in  a  large  industry. 

The  personal  interest  and  supervision  of  the  manager 
of  the  small  plant  often  overcomes  the  advantages  of 
large-scale  production.  We  see  examples  in  almost  every 
industry  of  the  small  producer  competing  successfully 
with  the  large  producer.  In  general  it  may  be  said  that 
in  industries  that  require  originality  of  workers  and 
adai)tability  to  several  processes,  as  in  farming,  the  small- 
scale  producer  has  the  advantage ;  while  in  industries 
using  specialized  mechanical  processes  the  advantage  lies 
with  the  large-scale  producer. 

Since  production  is  for  the  purpose  of  supplying  the 
needs  and  wants  of  the  consumers,  it  is  apparent  that  the 
consumers  have  a  direct  interest  in  the  most  efficient  con- 
duct of  productive  enterprises,  particularly  of  those  that 


PRODUCTION  43 

supply  the  necessaries  of  life.  An  inefBcient  system  of 
producing  shoes,  for  example,  must  he  of  concern  to  the 
users  of  shoes,  l>ecause  higher  prices  must  Ije  paid  on 
account  of  inefficiency.  Inefficient  agricultural  practices 
that  would  increase  the  price  of  wheat  would  react  direct- 
ly upon  all  consumers.  The  people  as  consumers  are  there- 
fore interested  in  the  most  efficient  system  of  producing 
essential  goods  and  of  placing  them  within  their  reach. 

Private  industries  may  be  relied  upon,  in  the  main,  to 
develop  and  use  efficient  methods  and  machinery  for  pro- 
duction. The  search  for  profits  will  lead  men  to  study 
and  apply  the  best  methods  in  industry,  especially  if  there 
are  rival  producers.  When  the  margin  of  profit  is  small, 
producers  must  make  special  efforts  to  promote  efficiency, 
because  of  the  danger  that  profits  may  be  wiped  out. 
When  the  margin  of  profits  is  large  and  when  competition 
is  not  keen,  there  is  not  the  same  driving  reason  for  the 
producer  to  study  and  apply  the  most  efficient  methods. 
The  intelligent  and  progressive  producer  will  promote 
efficiency  in  any  case,  but  the  unintelligent  and  unprogres- 
sive  may  not  do  so  unless  forced  by  the  competition  of 
his  rivals  or  the  fear  of  failure. 

The  problem  of  efficiency  in  production  has  in  the 
past  been  considered  solely  as  the  problem  of  the  pro- 
ducer. That  idea  is  being  modified  rapidly  with  the 
growing  need  for  essential  goods  and  the  increasing  cost 
to  the  consumer  of  goods  that  he  must  have.  There  is 
coming  to  be  a  clear  recognition  of  the  interest  of  the 
people  as  a  whole  in  the  efficiency  of  production  of  those 
goods  upon  which  the  livelihood  and  comfort  of  the  people 
depend. 


44        ECONOMICS  AND  THE  COMMUNITY 
Over-Production 

One  of  the  weaknesses  of  the  system  of  production  is 
that  the  producer  can  not  tell  whether  there  is  to  be  pro- 
duced too  much  or  too  little  of  an  article  in  any  year. 
Each  producer  produces  without  full  knowledge  of  what 
others  are  producing  or  of  the  extent  of  the  consumer's 
wants.  There  may  be  more  furniture  produced  than  the 
consumer  wants,  and  the  surplus  stock  may  compel  some 
producers  to  close  their  shops  until  the  demand  catches  up. 
The  farmer  sows  and  plants,  not  knowing  whether  the 
crops  are  to  be  small  or  large.  A  small  crop  and  a  high 
price  for  wheat  this  year  naturally  encourage  farmers  to 
sow  more  wheat  next  year.  A  large  crop  on  the  increased 
acreage  will  usually  cause  the  price  to  fall.  The  farmer 
can  not  accurately  gage  the  amount  and  ])rice  of  his  prod- 
ucts. This  is  especially  true  of  perishable  crops  such  as 
potatoes,  cabbage,  and  similar  crops. 

Where  one  person  or  a  small  number  of  persons  have 
full  control  of  a  product,  they  may  restrict  or  enlarge  the 
output  as  needed.  The  producers  of  petroleum  can  gen- 
erally determine  how  much  is  to  be  produced  because  a 
few  concerns  control  the  bulk  of  the  output.  In  most 
industries,  however,  this  is  not  the  case,  and  consid- 
erable uncertainty  confronts  the  producer  as  to  the  amount 
produced.  Aloreover,  the  amount  purchased  by  con- 
sumers will  depend  uj)on  circumstances.  A  mild  winter 
will  reduce  the  demand  for  gloves ;  a  crop  failure  will 
reduce  the  farmer's  purchasing  power  for  machinery ; 
a  period  of  business  depression  will  restrict  the  purchaser 
to  the  most  essential  goods. 


PRODUCTION  45 

Education  for  Efficient  Production 

On  account  of  the  clearer  recognition  of  the  importance 
of  production,  the  value  of  education  as  an  aid  to  produc- 
tion is  coming  to  be  clearly  understood.  Colleges  and 
vocational  schools  have  been  for  some  time  preparing 
men  and  women  for  the  farms,  shops,  offices,  and  engi- 


Learninp  to  be  producers 


neering  professions.  When  such  education  was  first  sug- 
gested, it  was  considered  theoretical  by  practical  men.  The 
"book  farmer,"  as  he  was  called,  had  to  prove  that  what 
he  learned  from  science  could  be  applied  to  produce  better 
crops.  He  proved  that  he  could  do  so,  and  great  num- 
bers of  farmers,  young  and  old,  began  to  go  to  agricul- 


46         IXONOMICS  AND  THE  COMMUNITY 

tural  schools  and  colleges.  Thousands  of  farmers  now 
go  annually  for  the  short  courses  at  the  state  schools  and 
colleges.  Thousands  of  young  people  are  studying  agri- 
culture in  vocational  schools,  high  schools,  and  colleges. 

The  study  of  trades  and  industrial  pursuits  has  also 
been  recognized  by  practical  men.  Commercial  education 
can  be  had  everywhere  in  business  schools,  high  schools, 
and  colleges.  Schools  for  the  engineering  profession,  in- 
cluding civil,  mechanical,  chemical,  electrical,  and  mining 
engineering,  have  prepared  the  greater  number  of  the  new 
recruits  to  the  profession.  Schools  of  business  manage- 
ment, to  train  men  to  organize  and  manage  industrial  and 
business  concerns,  are  growing  in  number. 

In  all  kinds  of  vocations  the  value  of  knowledge  applied 
in  the  day's  work  is  recognized,  and  training  in  one's  voca- 
tion is  deemed  essential. 

One  practical  type  of  vocational  education  has  been 
organized  by  means  of  part-time  schools  throughout  the 
country.  These  schools  take  the  student  for  a  part  of  the 
time  only  from  his  work,  and  teach  him  the  things  he 
needs  to  know  about  the  science  and  art  of  his  voca- 
tion. The  courses  in  these  schools  are  fitted  to  the  daily 
work  of  the  student,  and  thus  provide  a  practical  combin- 
ation of  theory  with  practice. 

Training  for  agricultural  or  industrial  vocations  brings 
direct  results  in  production.  Science  applied  to  the  soil 
produces  larger  crops.  Scence  applied  to  industrial  work 
imjjroves  the  processes  and  increases  production.  Science 
applied  to  the  management  of  industries  improves  the 
organization  of  business  enterprises  and  facilitates  pro- 
duction. 


PRODUCTION  47 

Questions  and  Problems 

1.  Define  production. 

2.  Define    form-utility ;    place-utility ;    time-utility.      Give 

examples. 

3.  Show  how  production  increases  needs  for  further  pro- 

duction. 

4.  How  does  it  happen  that  when  we  want  ordinary  goods 

we  generally  find  them  already  produced? 

5.  Does  this  mean  that  consumption  wants  follow  rather 

than  precede  production? 

6.  Give  as  many  examj)les  as  possible  of  extractive  pro- 

duction. 

7.  Is  the  smelting  of  iron  an  extractive  industry?     The 

making  of  steel? 

8.  Which   are  the  more   essential   industries,   extraction, 

manufacturing,   or  transportation? 

9.  What  are  the  factors  of  production? 

10.     Give  examples  of  land  as  a  factor  in  production, 
[I.     Which  is  the  most  essential — if  any  one  is  more  essen- 
tial than  another  in  production — land,  labor,  capital, 
or  management? 

12.  Have  we  reached  the  end  of  the  evolutionary  process 

of  change  in  the  organization  of  production? 

13.  How  do  producers  measure  the  consumers'  needs  in 

advance  ? 

14.  Describe    fully   the   term   "division   of   labor."      Make 

a  list  of  all  of  the  divisions  of  labor  you  have  ob- 
served. 

15.  Why  is  the  worker  in  the  city  interested  in  the  efficiency 

of  the  methods  of  farming? 

16.  Why  is  the  farmer  interested  in  the  efficiency  of  the 

methods  of  manufacture  and  distribution  of  goods? 

17.  What  forms  of  vocational  training  are  found  in  your 

schools  and  institutions? 

18.  Why  is  v(Jcational  education  of  interest  in  economics? 

References 

Sparling,  Business  Organization,  Chapters  1-5. 
Clay,   Economics  for   the   General   Reader,   Chapters   3 
and  4. 


CHAPTER  IV 

DISTRIBUTION    OF    GOODS 

Coonmnmty  Survey 

1.  Make  a  list  of  retailers,  wholesalers,  mail-order  houses, 

manufacturers  who  sell  direct  to  consumers,  and  all 
other  distributing  agencies  in  your  community. 

2.  How  do  the  producers  sell  their  products? 

The  distribution  of  goods  is  a  part  of  production.  It 
places  goods  within  reach  of  the  consumer,  thus  giving 
what  we  have  called  place-utility.  Distribution  also  in- 
cludes all  the  storage  facilities,  such  as  grain-elevators 
and  cold-storage  warehouses,  by  which  goods  are  kept 
until  the  time  they  are  wanted,  thus  giving  what  we  have 
called  time-utility.  Production  is,  in  fact,  not  completed 
until  the  goods  are  delivered  at  the  place  and  time  wanted. 

Simple  Forms  of  Distribution 

Some  goods  are  consumed  by  their  producers.  Farm- 
ers produce  the  bulk  of  their  own  food-stuffs.  The  ar- 
tisan constructs  some  articles  for  his  owm  use ;  nearly 
everyone  jjrovides  himself  with  some  of  the  products  he 
wants.  Distribution  may  be  simple  and  direct,  as  the 
delivery  of  milk  from  the  farm  by  the  producer  directly 
lo  the  consumer  in  the  village  or  city,  or  the  sale  and 

48 


DISTRIBUTION  OF  GOODS 


49 


delivery  of  the  products  of  the  truck  farm  directly  to  the 
consumer.  Even  the  iiuHrect  sale  of  farm  products  to  the 
consumer  through  the  merchant  or  the  produce  dealer 
in  the  near-by  village  or  city  is  comparatively  simple. 

In  early  times  practically  all  distribution  was  simple 
in  character,  because  the  bulk  of  products  was  delivered 
from  producer  to  consumer.  There  was  no  need  for 
elaborate  means  of  transportation  and  storage  of  goods 


Country  trading  center 


when  producer  and  consumer  dealt  directly  with  each 
other.  When  transportation  was  by  pack  or  wagon,  the 
products  that  were  carried  long  distances  were  few,  and 
those  mostly  precious  materials  of  small  bulk.  In  the 
middle  ages,  throughout  Europe,  distribution  was  largely 
by  means  of  markets  and  fairs.  People  came  to  central 
points  to  sell  their  goods,  and  the  consumers  or  merchants 
came  to  buy. 


50        ECONOMICS  AND  THE  COMMUNITY 
Modern  Distributive  System 

In  modern  times  more  elaborate  systems  are  needed, 
because   transportation    facilities   make   the   market    for 


Loading  cars  with  produce 

goods  world-wide.  Organization  on  a  large  scale  is  neces- 
sary to  supply  the  wants  of  consumers  with  the  goods 
of  the  world.  Systems  of  transportation  and  storage  have 
made  it  possible  to  deliver  goods  at  the  time  and  place 
needed.     The  development   of   means   of   transportation 


DISTRIBUTION  OF  GOODS  51 

makes  the  organization  of  distribution  more  and  more 
important.  Local  manufacture  of  products  for  local  use 
has  given  way  to  specialized  industries  in  distant  cities 
and  towns.  The  products  of  the  farms  are  sent  to  far- 
away points  wherever  needed.  The  products  of  the 
specialized  industries  of  the  cities  and  towns  in  turn 
reach  the  consumer  in  distant  places.  We  are  reminded 
of  the  possibility  of  bad  consequences  when  the  organiza- 
tion of  distribution  is  inefficient  or  breaks  down.  A  flood 
or  storm,  disorganizing  the  supplies  of  a  city,  brings  the 
people  to  serious  distress   for  lack  of   food  or  fuel. 

The  central  feature  of  distribution  is  the  system  of 
transportation.  This  subject  is  dealt  with  in  another 
chapter,  but  its  place  in  distribution  will  be  here  sug- 
gested. From  the  beginning  of  recorded  time  transpor- 
tation facilities  have  been  improving,  and  with  each  im- 
provement the  system  of  distribution  has  been  extended 
and  quickened.  Each  improvement  has  added  new  mar- 
kets and  demands  for  goods,  and  enlarged  old  markets  and 
demands.  Early  transportation  followed  the  water- 
courses. The  interior  was  isolated.  The  day  of  the  trail 
was  the  day  of  local  markets.  Highways  extended  the 
area  of  transportation.  Wheeled  vehicles  made  land 
transport  easier.  Systems  of  good  roads  decreased  the 
cost  of  carrying  products  and  made  it  possible  to  trans- 
port goods  over  longer  distances.  Canals  penetrated  to 
new  centers  and  opened  new  markets  and  new  sources  of 
supply. 

The  railroad  and  the  steamship  brought  virtually  every 
corner  of  the  civilized  world  within  the  range  of  the  dis- 
tributive system.     The  motor-truck  is  fast  linking  up  the 


52        ECONOMICS  AND  THE  COMMUNITY 

isolated  producers  and  consumers  with  the  centers  of 
transportation.  The  airplane  has  just  begun  to  show  its 
possibilities  for  the  transportation  of  small  articles  where 
speed  is  essential.  The  invention  of  refrigerator  cars 
and  ships  has  made  it  possible  to  bring  many  perishable 
products  within  reach  of  millions  at  all  seasons  of  the 
year.  Transportation  has  enabled  the  building  of  big 
cities  and  industrial  centers.  It  has  also  made  those  cities 
and  centers  more  sensitively  dependent  upon  the  outside 
world.  It  has  enabled  the  producer  on  the  farm  and 
in  the  city  alike  to  provide  for  a  wider  market ;  but  it 
has  made  producers  and  consumers  alike  dependent  to  a 
greater  degree  upon  the  efficiency  of  the  distributive 
system. 

Storage 

Storage  is  an  important  factor  in  the  distribution  of 
goods.  When  distribution  was  local  the  problem  of  stor- 
age was  simple.  The  ])roducer  or  the  local  dealer  sup- 
plied whatever  storage  was  required.  Now,  when  goods 
are  purchased  months  and  even  years  in  advance  of  use, 
they  must  be  stored.  Wheat  is  harvested  in  a  few 
weeks'  time,  but  must  supply  the  needs  for  the  rest  of 
the  year.  Warehouses  and  grain-elevators  are  therefore 
needed  in  agricultural  centers  to  save  the  grain  and 
equalize  the  supply  to  the  market  throughout  the  year. 
The  proflucer  sells  or  stores  his  wheat  to  secure  cash  for 
his  immediate  needs.  Local  and  central  warehouses  and 
elevators  have  been  built  to  provide  storage  within  reach 
of  the  farmers  and  the  market.  Cold-storage  warehouses 
have  been  built  to  meet  the  need  for  storage  of  perishable 


DISTRIBUTION  OF  GOODS 


53 


goods.  They  serve  the  purpose  of  equalizinj^  prices  in 
dififerent  seasons,  and  make  it  possible  to  distribute  goods 
more  widely  and  throughout  longer  seasons.  Without  cold 


Cold  storage  plant 

storage  such  products  as  eggs  would  be  extremely  cheap 
during  certain  seasons  and  quite  beyond  reach  in  other 
seasons. 

Terminals  and  Warehouses 
Terminal  facilities  are  essential  in  the  distributive  sys- 
tem. No  matter  how  efficient  production  or  transporta- 
tion may  be,  they  will  not  serve  the  people  efficiently  un- 
less products  can  be  readily  loaded,  unloaded,  and  cared 
for  at   the   terminals.      Ship-owners   may   do   their   part 


54        ECONOMICS  AND  THE  COMMUNITY 

efficiently  in  bringing  goods  across  the  seas,  but  their 
work  would  be  seriously  hampered  by  lack  of  adequate 
docks  and  warehouses  to  which  the  ships  could  be  un- 
loaded. 

The  terminal  facilities  are  frequently  overlooked  in 
the  plans  for  transportation  systems.  Cities  frecjuently 
make  only  slight  provision  for  terminal  facilities  for 
railroads,  ships,  or  trucks.  It  costs  considerably  more 
than  it  should  to  get  goods  in  and  out  of  a  terminal  or 
from  a  wharf  if  facilities  are  not  well  planned.  This 
extra  cost  and  inconvenience  must  be  paid  by  the  con- 
sumer. Progressive  cities  are  planning  and  constructing 
adequate  railroad  terminals,  docks,  and  wharves  for  pas- 
sengers and  freight.  Cities  that  are  making  intelligent 
plans  for  the  future  are  also  arranging  for  landing-fields 
for  airplanes. 

The  statements  regajding  terminals  also  apply  to  the 
unloading  of  goods  at  rural  stations  or  at  factories,  mills, 
and  mines.  Anything  that  makes  this  process  slower  or 
more  expensive  adds  to  the  cost  of  articles  to  the  con- 
sumer. Every  extra  handling  of  goods  is  an  economic 
loss,  and  in  the  long  run  the  people  must  pay  for  the  loss. 

Transportation  of  People 

The  transportation  of  people  with  the  least  amount  of 
waste  time  and  with  the  greatest  ease  is  often  over- 
looked as  a  problem  in  economics.  When  a  worker  must 
lose  time  unnecessarily  in  going  to  his  work  because  of 
an  inefficient  street-car  system,  it  is  plainly  an  economic 
loss  to  him.  The  worker  must  live  closer  to  his  work. 
perhaps  in  crowded  sections,  or  spend  an  excessive  amount 


DISTRIBUTION  OF  GOODS  55 

of  time  g'oing  to  and  from  his  work.  When  thousands  are 
thus  inconvenienced  the  loss  becomes  serious.  The  time 
lost  in  transferring  thousands  of  passengers  from  one 
station  to  another  in  a  city  is  a  waste.  Much  time  and 
energy  are  wasted  in  some  cities  of  our  country  by 
poor  and  ill  j)lanncd  transportation. 

Buying  and  Selling  Goods 

We  come  now  to  the  consideration  of  another  phase 
of  distribution,  namely,  the  system  by  which  the  pro- 
ducer sells  his  goods  to  the  consumer.  As  far  as  the  local 
market  is  concerned,  the  process  needs  no  special  explan- 
ation. The  goods  are  shown  to  the  prospective  purchaser 
and  a  direct  sale  is  made.  The  farmer  may  sell  milk  from 
his  dairy  or  potatoes  from  his  field  to  the  local  con- 
sumer. Such  processes  of  trade  are  simple.  The  busi- 
ness problem  of  distribution  arises  from  the  necessity  of 
arranging  for  a  market  for  goods  next  month  or  next 
year  in  widely  scattered  places. 

Let  us  take  the  example  of  a  manufacturer  of  boots  and 
shoes.  The  manufacturer  must  have  a  continuous  market 
for  his  shoes,  or  else  the  factory  could  not  operate  con- 
tinuously. What  are  the  methods  by  which  the  manufac- 
turer may  reach  the  consumers  of  boots  and  shoes?  First, 
he  may  organize  to  sell  his  shoes  directly  to  the  consumer 
by  establishing  local  stores.  This  is  done  by  several  well 
known  manufacturers  of  shoes.  Secondly,  he  may  adver- 
tise through  newspapers,  magazines,  or  circulars,  and 
sell  directly  from  the  factory  to  the  consumer.  Thirdly, 
he  may  secure  local  merchants  as  agents  to  handle  his 
shoes  on  a  commission.     This  is  a  common  method  by 


56        ECONOMICS  AND  THE  COMMUNITY 

which  the  manufacturer  is  relieved  of  the  risk  of  organiz- 
ing and  conducting  local  stores.  To  avoid  this  uncer- 
tainty he  may  sell  his  shoes  to  the  retailers,  who  then 
take  the  responsibility  of  disposing  of  the  goods  to  the 
consumer.  Lastly,  he  may  sell  in  advance  to  a  jobber 
or  wholesaler,  who  organizes  the  business  of  selling  the 
shoes  at  his  own  risk.  The  jobber  or  wholesaler  finds 
the  market,  and  thereby  relieves  the  producer  of  all  mat- 
ters excepting  the  manufacture  of  the  shoes.  This  is  the 
common  method  employed  by  manufacturers.  The  job- 
bers and  wholesalers  organize  the  market  and  take  from 
the  manufacturer  the  risk  of  disposing  of  the  goods. 

Whether  the  sale  is  made  directly  to  the  consumer  by 
the  manufacturer,  or  indirectly  through  jobbers,  whole- 
salers, or  retailers,  some  one  must  Ijear  the  risk  that  the 
shoes  will  be  needed  at  the  i)rice  asked  for  them,  or  that 
some  other  brand  will  not  be  preferred.  Whoever  as- 
sumes the  task  of  selling  shoes  analyzes  the  market  and 
the  probable  supply  from  all  sources.  He  will  attempt  to 
determine  what  the  probable  demand  for  shoes  will  be 
and  what  the  entire  supply  will  be.  If  he  analyzes  cor- 
rectly he  may  make  a  profit;  otherwise  he  may  suffer 
a  loss. 

Selling  Agricultural  Products 

Let  us  now  take  another  example  of  selling  goods, 
namely,  the  marketing  of  wheat.  Wheat  is  produced  by 
a  multitude  of  small  farmers  scattered  over  wide  areas 
of  country.  Few  producers  are  in  a  position  to  handle  the 
problem  of  selling  their  wheat  in  the  same  way  as  the 
manufacturer   of   shoes.      With   the   exception   of   some 


1   ^ 


H 


u 


i'r 


57 


58        ECONOMICS  AND  THE  COMMUNITY 

small  sales  to  millers  in  the  local  market,  there  is  no  direct 
selling  of  wheat  by  the  producer  to  the  consumer.  Neither 
is  there  any  ti^reat  amount  of  selling  directly  to  retailers; 
nor  do  jobbers  and  wholesalers  buy  the  product  and  or- 
ganize the  selling  of  it  in  the  same  manner  of  manufac- 
tured products. 

The  system  of  selling  wheat,  and  likewise  most  other 
farm  products,  is  worked  out  through  exchanges  or  boards 
of  trade.  The  producer  takes  his  wheat  to  the  local  ele- 
vators or  the  terminal  elevators.  Wheat  is  graded  accord- 
ing to  quality,  and  the  owner  receives  a  warehouse  receipt 
for  a  certain  amount  of  a  certain  grade  of  wheat.  The 
wheat  brokers,  who  are  organized  in  the  exchange  or 
board  of  trade,  buy  and  sell  wheat  for  future  delivery. 
Only  members  are  allowed  to  buy  and  sell  on  these  ex- 
changes. The  members  of  the  exchange  may,  however, 
buy  and  sell  for  outsiders  at  certain  rates  of  commission 
which  are  fixed  by  the  rules  of  the  exchange. 

The  wheat  brokers  are  specialized  dealers  who  are  in 
touch  with  the  market  conditions.  They  analyze  the 
market  months  in  advance,  and  buy  or  sell  at  a  certain 
price  for  delivery  at  a  certain  time,  perhaps  several  months 
later.  The  actual  owner  of  the  wheat  sells  it  through 
the  brokers.  The  millers  and  other  wheat  purchasers  buy 
through  the  brokers.  Speculators  buy  and  sell  wheat 
through  the  brokers  for  future  delivery,  on  the  gamble 
that  prices  will  go  up  or  down.  Out  of  this  conflict  of 
buyers  and  sellers  the  price  of  wheat  is  fixed  several 
months  in  advance.  When  a  sale  is  made  of  actual  wheat 
for  present  delivery   the  warehouse  receipts  are  turned 


DISTRIBUTION  OF  GOODS  59 

over  to  the  Iniyer.     These  receipts,  as  we  have  seen,  call 
for  a  certain  amount  of  a  certain  grade  of  wheat. 

Exchanges  exist  for  all  of  the  main  products  of  the 
farm.  The  Board  of  Trade  of  Chicago  and  the  Chamber 
of  Commerce  of  Minneai)olis  are  the  principal  wheat 
exchanges.  Other  exchanges  are  the  New  York  Produce 
Exchange,  the  New  York  Cotton  Exchange,  the  New 
Orleans  Cotton  Exchange,  the  New  York  Coffee  Ex- 
change, the  Live-Stock  Exchange  of  Chicago,  and  the 
Richmond  Tobacco  Exchange.  There  are  many  smaller 
exchanges  for  the  sale  of  the  same  products  and  other 
products.  In  each  of  these  exchanges  the  process  is 
about  the  same  as  that  described  for  the  sale  of  wheat. 

These  exchanges  work  under  rules  and  regulations 
which  aim  to  prevent  manipulation  and  fraud.  They  are 
subject  to  much  criticism  because  of  the  amount  of  gam- 
bling that  creeps  in.  Sometimes  speculators  attempt  to 
secure  control  of  the  supply  of  a  product  by  means  of  a 
"corner,"  Attempts  of  this  sort  have  been  more  often 
a  failure  than  a  success.  The  evils  of  a  single  successful 
"corner"  have  caused  justifiable  criticism.  The  agitation 
for  closer  public  regulation  of  the  exchanges  to  prevent 
gambling  and  the  manipulation  of  prices  resulted  in  the 
passage,  in  192 1,  of  a  federal  law  to  prevent  certain  evils 
in  the  grain  exchanges.  Considerable  power  was  given 
to  the  Secretary  of  Agriculture  to  regulate  and  control  the 
practices  of  these  exchanges. 

The  advantages  of  the  system  of  exchanges  are 
summed  up  by  Sparling  in  his  book  on  "Business  Organi- 
zation" as  follows:    "First,  it  tends  to  establish  stability 


6o        ECONOMICS  AND  THE  COMMUNITY 

of  price;  second,  it  distributes  the  risk  among  a  special 
expert  commercial  class;  third,  it  relieves  the  producer 
and  consumer  from  carrying  a  whole  year's  stock  for  bet- 
ter prices ;  fourth,  it  reduces  the  profits  of  the  middle- 
man ;  and  fifth,  it  means  cash  to  the  producer  and  a  regu- 
lar supply  to  the  consumer."  With  effective  public  regu- 
lation, exchanges  give  the  advantage  of  organizing  the 
market  for  thousands  of  scattered  producers  who  could 
not  do  it  for  themselves,  and  of  fixing  prices  in  advance, 
so  that  consumers  may  buy  at  a  definite  price  for  delivery 
at  a  future  time.  In  contrast  to  the  method  of  selling 
employed  in  disposing  of  manufactured  goods  this  sys- 
tem, if  honestly  conducted  without  gambling,  has  some 
advantages. 

Jobbers  and  Wholesalers 

The  jobber  and  the  wholesaler  stand  between  the  manu- 
facturer and  the  retailer.  They  buy  a  product  from  the 
manufacturer  and  organize  the  market.  Sometimes  the 
entire  output  of  one  or  more  manufacturers  is  handled  by 
one  jobl^r  or  wholesaler.  The  business  of  jobbing  and 
wholesaling  is  specialized  into  single  lines  such  as  hard- 
ware, drygoods,  drugs,  and  groceries.  The  wholesaler 
or  jobljer  makes  a  specialty  of  one  of  these  lines.  The 
managers  of  the  business  of  wholesaling  or  jobbing  there- 
fore Ijecome  expert  in  the  lines  of  goods  that  they  handle 
and  are  consequently  specially  informed  and  able  to  as- 
sume the  risks. 

In  some  lines  of  business  the  department-store,  the 
mail-order  house,  and  direct  selling  by  the  manufacturer 
have  virtually  driven  the  jobber  and  wholesaler  out  of 


DISTRIBUTION  OF  GOODS 


6i 


business.  In  other  lines  their  services  are  increasing,  es- 
pecially in  handling  the  products  of  manufacturers  who 
are  unable  because  of  limited  output  or  otherwise  to  or- 
ganize direct  selling  to  consumers  or  to  sell  directly  to 
retailers. 


The  mailing  of  packay^.:^  in  a  large  iiiail-onler  house 

The  M ail-Order  House 
In  recent  times  the  mail-order  house  has  been  developed 
especally  to  meet  the  needs  of  the  country  trade.  The 
mail-order  house  is  usually  conducted  on  a  large  scale. 
It  is  able  to  purchase  directly  from  manufacturers,  and 
thereby  serves  the  function  of  the  jobber  and  the  whole- 
saler. A  large  mail-order  house  sometimes  purchases  the 
entire  output  of  a  factory.    It  sells  directly  to  the  individ- 


62 


FXONOMICS  AND  THE  COMMUNITY 


iial.  promoting  its  business  by  means  of  advertising  in 
newspapers,  circulars,  and  catalogs.  Shipments  are  made 
by  freight,  express  and  parcel  post,  and  payments  are 
matle  in  advance  or  when  the  goods  are  delivered.     The 


Interior  of  a  department  store 

entire  business  is  conducted  by  mail  without  the  use  of 
agents.  The  carefully  prepared  catalogs  of  mail-order 
houses  bring  information  concerning  many  lines  of  goods 
that  the  small-town  or  country  store  is  unable  to  carry. 


The  Retailer 
The  retailer  stands  next  to  the  consumer.     His  busi- 
ness is  direct  selling.     He  anticipates  what  his  customers 
will  want,  and  provides  in  advance  to  have  a  stock  of 


DISTRIBUTION  OF  GOODS  63 

goods  on  hand,  lie  buys  from  the  wholesaler  or  in 
some  cases  directly  from  the  factory.  If  his  business  is 
extensive,  as  in  the  case  of  large  department-stores,  he 
usually  is  able  to  deal  directly  with  the  manufacturer,  thus 
eliminating  the  wholesaler.  His  business  succeeds  by  his 
ability  as  a  buyer  and  as  a  salesman,  or  by  his  ability  to  se- 
cure good  buyers  or  salesmen,  by  the  courtesy  with  which 
he  treats  his  customers,  by  the  quality  of  his  goods,  and 
finally  by  the  price  that  he  asks  for  his  goods.  His  prob- 
lem is  to  gage  the  desires  of  his  customer.  He  loses 
when  he  overstocks  with  goods  that  his  customers  will 
not  buy. 

Retailers  sometimes  carry  many  lines  of  goods,  as 
in  the  department-store.  They  also  specialize,  as  in  single- 
line  stores.  Each  of  these  types  has  its  advantages,  and 
both  are  necessary  in  dififerent  localities.  A  store  that  car- 
ries several  lines  of  goods  has  a  wider  range  of  custom- 
ers. The  single-line  store,  however,  by  concentrating  on 
certain  goods.  l>ecomes  more  expert  in  the  goods  that  it 
handles.  Many  i)eoi)le  prefer  to  buy  at  a  single-line  store, 
even  at  higher  prices,  because  of  the  better  knowledge 
of  goods  possessed  by  those  who  specialize  in  a  particular 
line. 

The  retailer  sometimes  organizes  his  business  on  a 
large  scale  by  establishing  a  number  of  stores  located  in 
different  cities,  or  in  dififerent  localities  of  the  same  city. 
These  stores  are  under  one  management.  The  large  busi- 
ness transacted  by  several  stores  makes  it  possible  on  the 
part  of  the  managers  to  purchase  goods  more  economically 
by  dealing  directly  with  the  producers. 


64        ECONOMICS  AND  THE  COMMUNITY 

The  Auction 
The  auction  as  a  system  of  disposal  of  goods  is  well 
known  to  almost  everyone.  The  farm  auction,  where  a 
farmer  disposes  of  his  stock  and  ecjuipment  to  the  highest 
bidder,  is  well  known  in  rural  districts.  The  auction  of 
household  goods,  books,  and  antiques  is  familiar  to  all 
observers  in  the  city.  As  a  system  of  selling  goods  on 
a  large  scale  the  auction  is  not  so  well  known.  Some 
products  are  sold  almost  entirely  at  auction.  The  new 
gokl  of  the  world  is  sold  at  auction  in  London  at  regular 
times.  Nearly  the  entire  supply  of  imported  fruit  in  this 
country,  l)aiianas  in  particular,  is  sold  at  auction.  The 
apple  crop  has  in  some  instances  been  sold  at  auction. 
These  are  examples  of  what  may  become  an  important 
system  of  selling  certain  kinds  of  goods. 

Purchasing  Systems 
The  consumer  also  takes  a  part  in  the  organization  of 
distrilmtion.  He  is  not  always  a  passive  factor,  waiting 
for  the  producer  or  his  agents  to  come  to  him.  He  goes 
into  the  market  himself,  seeking  the  goods  he  wants. 
Large  business  concerns  employ  purchasing  agents  and 
have  well  equipi)c(l  purchasing  departments.  It  is  the  busi- 
ness of  these  departments  to  purchase  all  supplies  needed 
by  the  concern.  Purchasing  departments  seek  out  the 
best  sources  of  supply  and  the  best  bargains.  They  deal 
with  the  retailer,  wJKjlesaler,  or  ])r()ducer.  Some  cities, 
towns,  .schools,  and  public  departments  employ  agents  to 
purchase  all  supplies  for  their  use.  Cooperative  societies 
sometimes  organize  their  purchases  through  purchasing 
agents. 


DISTRIBUTION  OF  GOODS 


65 


It  will  be  seen  from  these  examples  that  the  organiza- 
tion of  distribution  is  not  entirely  in  the  hands  of  the 
producer  and  distributor.  The  i^nnvth  of  cooperative 
societies  and  of  i)urchasing  departments  in  business  con- 
cerns and  in  i)ul)lic  work  is  changing  the  system  of  dis- 
tribution, so  that,  in  the  purchase  of  many  lines  of  goods, 


Purchasing  department  of  a  large  industry 

organized  consumers  on  their  own  initiative  are  bargain- 
ing direcdy  with  the  producers  instead  of  waiting  for 
solicitation  by  the  producer  or  distributor. 

Competitive  Bidding 

The  practice  of  competitive  bidding  is  becoming  more 
common  in  purchasing  by  business  concerns  and  public 
departments.  The  consumer  having  a  need  lor  certain 
goods  or  services  advertises  the  fact,  with  specifications 


66         ECONOMICS  AND  THE  COMMUNITY 

of  the  goods  or  services  needed.  The  producers  make 
bids  for  the  supply  of  the  goods  or  services,  and  the  con- 
tract is  let  to  the  lowest  bidder  who  is  responsible.  This 
plan  of  organized  purchasing  gives  certain  advantages 
to  the  consumer ;  the  producers  must  meet  the  consumers' 
specifications  in  open  competition  with  other  producers. 

Defects  of  Distribution 

The  process  by  which  goods  are  transferred  from  pro- 
ducer to  consumer  should  be  as  simple  as  possible.  Where- 
ever  possible  the  consumer  should  be  able  to  buy  directly 
from  the  producer.  For  the  great  bulk  of  goods  this  is 
obviously  imjjossible.  The  consumer  of  sugar  in  Wis- 
consin can  not  readily  deal  with  the  producer  in  Cuba. 
The  residents  of  the  city  can  buy  but  a  mere  fraction 
of  their  food  supplies  directly  from  the  farmer.  Organi- 
zation is  necessary  to  supply  the  service  of  distribution. 
A  distributive  organization  is  a  necessary  part  of  the 
process  of  supplying  products  at  the  time  and  place 
needed. 

The  defect  of  existing  systems  of  distribution  is 
found  in  the  excessive  number  of  distributors,  or  middle- 
men, as  they  are  called.  That  middlemen  are  necessary 
is  clear  when  we  analyze  the  actual  process  by  which 
goods  must  reach  the  consumer.  When,  however,  goods 
are  sold  and  resold,  and  finally  reach  the  consumer  after 
passing  through  several  hands,  the  cost  to  the  consumer 
is  excessive  because  of  the  numerous  profits  that  have 
been  taken  by  the  numerous  middlemen  who  have  handled 
the  product.  Products  sometimes  pass  through  as  many 
as  eight  or  ten  hands,  each  taking  a  profit,  before  reach- 


DISTRIBUTION  OF  GOODS  67 

ing  the  consumer.  This  fact  accounts  for  the  wide  mar- 
gin between  the  amount  the  producer  receives  and  the 
amount  the  consumer  pays  for  the  same  article. 

Questions  and  Problems 

1.  What  are  the  means  of  transportation  by  which  the 

prochicts  of  your  community  reach  the  consumer? 

2.  Figure  the  relative  importance  of  the  highways,  rail- 

roads, canals,  and  steamships  in  transporting  goods 
from  producer  to  consumer  in  your  community. 

3.  What   facilities    for  storage  of   grain,   potatoes,   eggs, 

and  dairy  i)roducts  are  found  in  your  community? 

4.  What  effect  does  cold  storage  have  in  your  city  upon 

the    prices    of    eggs,    meat,    and    fruits    at    different 
seasons. 

5.  What  is  the  function  of  the  wholesaler  and  jobber? 

6.  Is  it  possible  to  do  away  with  the  business  of  the  whole- 

saler and  the  jobber  and  sell  directly  from  producer 
to  retailer  ? 

7.  What  are  the  advantages  and  disadvantages  of  direct 

selling  from  the  producer  to  the  consumer? 

8.  What  examples  are  there  in  your  community  of  direct 

selling  from  producer  to  consumer? 

9.  Do  mail-order  houses  do  business  in  your  community? 

10.  What    advantages   do   people   claim    for   dealing   with 

mail-order  houses  ? 

11.  Describe  a  department-store. 

12.  What   advantages   and    disadvantages    are    there    in   a 

department-store  in  com})arison  with  the  dealer  who 
sells  a  single  line  of  goods? 
LT,-  Get  further  information  regarding  one  of  the  following 
exchanges  :  wheat  exchange,  tobacco  exchange,  coffee 
exchange,  butter  and  cheese  market,  live-stock  ex- 
change. 

14.  What   are   the   advantages    antl   disadvantages   of   ex- 

changes for  agricultural  products .-' 

15.  What  are  the  chief  elements  of  an  efficient  system  of 

distribution  of  goods? 

16.  What   means   can    be   suggested    looking   toward    the 


68         ECONOMICS  AND  THE  COMMUNITY 

making  of  more  direct  sales  between  the  producer 
of  raw  material  and  the  manufacturer,  and  between 
the  manufacturer  and  the  consumer? 
17.  What  means  can  be  suggested  looking  toward  the  more 
direct  selling  of  farm  products  from  the  producer 
to  the  consumer? 

References 

Sparling,  Business  Organization,  Chapters  9-14. 
Briscoe,  Economics  of  Business,  Chapters  10  and  11. 


CHAPTER  V 

BUSINESS   ORGANIZATION 

Community  Survey 

1.  Makx  a  list  of  businesses  in  your  community  conducted 

by  individuals,  by  partnersliips,  and  by  corporations. 

2.  Secure  samples  of  articles  of  incorporation,  shares  of 

stock    of    corporations,    and    articles    of    agreement 
among  partners. 

The  organization  of  business  activities  now  claims  our 
attention.  We  have  seen  that  men  work  in  order  to  pro- 
vide for  their  wants,  including  the  necessities,  comforts, 
and  luxuries  of  life.  Many  work  also  to  accumulate 
property  or  acquire  power  in  addition  to  their  immediate 
needs. 

Anyone  may  engage  in  any  lawful  occupation  accord- 
ing to  his  own  choice.  He  may  organize  a  business  of  his 
own,  or  he  may  work  as  an  employee  for  another.  H  he 
organizes  a  business,  whether  it  be  as  simple  as  a  peanut- 
stand  or  as  complex  as  a  steel  plant,  he  takes  the  risk 
of  being  able  to  secure  a  profit  for  himself  after  the 
expenses  of  running  the  business  are  paid.  If  he  works 
for  others  he  does  not  assume  that  risk,  but  receives  a 
definite  amount  for  his  services. 

The  organizer  of  a  business  is  sometimes  called  an 
enterpriser,  or  an   entrepreneur.     There   is  no  essential 

69 


70        ECONOMICS  AND  THE  COMMUNITY 

difference  between  the  enterpriser  who  organizes  and  runs 
the  business  of  a  farm  and  the  enterpriser  who  organizes 
a  manufacturing  plant.  Each  takes  the  risk  of  securing 
a  profit  after  the  expenses  of  running  the  business  are 
paid. 

Individual   Organizers 

The  simplest  form  of  business  organization  is  that  of 
the  individual  organizer.  One  person  undertakes  to  run 
a  business.  He  secures  the  necessary  equipment,  em- 
ploys assistants  if  needed,  and  takes  the  profits  if  the  in- 
come is  greater  than  the  cost.  The  majority  of  farmers 
are  individual  business  organizers.  The  farmer  secures 
land  and  farm  equipment,  hires  labor,  and  takes  the  risk 
of  securing  profits  from  combining  land,  labor,  and  equip- 
ment in  the  production  of  crops. 

Numerous  other  enterprises,  such  as  retail  stores  and 
small  shops,  are  owned  and  managed  by  individual  busi- 
ness men. 

Partnerships 

When  two  or  more  individuals  combine  to  conduct  a 
business  jointly,  the  form  of  organization  is  called  a  part- 
nership. The  partners  combine  their  labor,  management, 
capital  and  land  and  hire  additional  land,  labor  and  capi- 
tal if  necessary,  to  conduct  a  business.  Partnerships  have 
the  united  strength  and  resources  of  two  or  more  per- 
sons. 

The  partner.ship  is  formed  by  an  agreement  among  the 
partners  setting  forth  the  purpose  of  the  partnership,  the 


BUSINESS  ORGANIZATION  71 

nature  of  the  business  to  be  performed,  the  powers  that 
may  l)e  exercised  by  the  in(Uvi(hial  partners  in  carrying 
on  the  business,  and  the  method  of  dividing  the  profits. 
The  value  of  the  partnership  consists  principally  in  the 
union  of  skill  and  resources  of  the  several  partners,  thus 
enabling  many  things  to  l^e  undertaken  that  would  be  im- 
possible for  any  one  of  the  partners  acting  alone.  The 
advantage  of  the  union  of  skill  is  seen  clearly  in  the  run- 
ning of  a  store.  One  partner  may  be  a  good  salesman 
but  a  poor  IxDokkeeper,  while  another  may  be  a  poor 
salesman  and  a  good  bookkeeper.  Still  a  third  may  be  an 
expert  buyer  of  goods.  Such  a  partnership  combines  the 
skill  essential  to  the  success  of  the  business. 

The  weakness  of  a  partnership  lies  principally  in  the 
fact  that  each  of  the  partners  is  liable,  as  a  rule,  to  the 
extent  of  his  entire  fortune  for  the  lawful  acts  of  any 
of  the  partners  in  the  conduct  of  the  business.  A  part- 
ner may  lose  not  merely  what  he  has  invested  in  the 
business,  but  also  all  other  property  possessed  by  him. 
through  the  dishonesty  or  bad  judgment  of  a  partner. 
Men  naturally  fear  such  risks.  This  risk  is  ofifset  by  a 
special  form  of  limited-liability  partnership.  In  this  form 
a  partner's  liability  for  the  debts  of  the  partnership  is 
limited  to  the  amount  of  his  interest  in  the  partnership. 

Until  about  fifty  years  ago  the  partnership  was  the 
prevailing  form  of  business  organization  for  large  under- 
takings. It  is  still  found  to  a  considerable  extent  in  the 
professions,  especially  the  law,  and  in  small  retail  and 
manufacturing  enterprises.  In  the  main,  however,  it  has 
given  way  to  the  corporation. 


Itl— AniclrolCs-r^nncnUp.  .  ••  •«  «».  Juliw  Blonbcrc.  Pnetcf.  Uw  Blink  PubRihrr.  ind  Mrg.  Suti 

2U    Cr4B<l    Street    Nr«    Y«fi. 

Arttrlps  of  AgiTf  mpttt. 


9(tn>(tii 


i/'y  of  one  thousand  nine  hundred  and 


as  follows:      The  said  patties  above  named  have  agreed  to  become  co-partners  in  business, 

and  by  these  presents  do  agree  to  be  co-partners 
together  under  and  by  the  name  or  firm  of 


in  the  buying,  selling  and  vending  all  sorts  of  goods,  wares  and 

merchandise  to  tht  said  business  belonging,  and  to  oaupy  the 


their  co-partnership  to  commence  on  the 
and  to  continue 


and  to  that  end  and  purpose  tht  said 


lobe  used  and  employed  in  common  between  them  for  the  support  and  management  of  the  said 
business,  to  their  mutual  benefit  and  advantage,  ^nd  it  is  agreed  by  and  between  the  parlies 
to  these  presents,  that  at  all  times  during  the  continuance  of  their  co-partnership,  they  and 
each  ^f  them  will  give  their  attendance,  and  do  their  and  each  of  their  best  endeavors,  and 
to  the  utmost  of  their  skill  and  power,  exert  themselves  for  their  joint  interest, profit,  benefit 
Tnd  advantage,  and  truly  employ,  buy,  sell,  and  merchandise  with  their  joint  stock,  and  the 
increase  thereof,  in  the  business  afortiaid.     3^nfl  Slso,  that  they  shall  and  will  at  all  times 

Page  one  of  a  partnership  agreement 

72 


during  the  said  co-partnership,  bear,  pay  and  discharge  equally  between  them,  all  rents  and 
ether  expenses  that  may  be  required  for  the  support  and  management  of  the  said  business; 
and  that  all  gains,  profit  and  increase,  that  shall  come,  grow  or  arise  from  or  by  means  of 
their  said  business  shall  be  divided  between  them 


and  all  loss  that  shall  happen  to  their  said  joint  business  by  ill-commodities,  bad  debts  i 
otherwise  shall  be  borne  and  paid  between  them 


^ad  it  is  agreed  by  and  between  the  said  parties,  that  there  shall  be  had  and  kept  at  all 
times  during  the  continuance  of  their  co-partnership,  perfect,  just,  and  true  books  of  account, 
wherein  each  of  the  said  co-partners  shall  enter  and  set  down,  as  well  all  money  by  them  or 
either  of  them  received,  paid,  laid  out  and  expended  in  and  about  the  said  business,  as  also 
all  goods,  wares,  commodities  and  merchandise,  by  them  or  either  of  them,  bought  or  sold,  by 
reason  or  on  account  of  the  said  business,  and  all  other  matters  and  things  whatsoever,  to  the 
said  business  and  the  management  thereof  in  anywise  belonging ;  which  said  book  shall  be 
used  in  common  between  the  said  co-partners,  so  that  either  of  them  may  have  access  thereto, 
without  any  interruption  or  hindrance  of  the  other,     ^ud  also,  the  said  co-partners,  once  in 


or  oftener  if  necessary,  shall  make,  yield  and  render,  each  to  the  other,  a  true,  just  and  per- 
fect inventory  and  account  of  all  profits  and  increase  by  them  or  cither  of  them,  made,  and  of 
all  losses  by  them  or  either  of  them,  sustained;  and  also  all  payments,  receipts,  disbursements 
and  all  other  things  by  them  made,  received,  disbursed,  acted,  done,  or  suffered  in  this  said 
co-partnership  and  business;  and  the  same  account  so  made,  shall  and  will  clear,  adjust,  pay 
3nd  deliver,  each  to  the  other,  at  the  timt,  their  just  share  of  the  profits  so  made  as  aforesaid. 
gmd  the  said  parties  hereby  mutually  covenant  and  agree,  to  and  with  each  other,  that  dur- 
ing the  continuance  of  the  said  co-partnership,  of  them  shall  nor  will  endorse  any 
note,  or  otherwise  become  surety  for  any  person  or  persons  whomsoever,  nor  will  sell,  assign, 
transfer,  mortgage  or  otherwise  dispose  of  the  business  of  the  co-partnership,  nor  each  of 

share,  title  and  interest  therein  without  the  written  consent  of  the  parties  hereto. 
And  at  the  end  or  other  sooner  termination  of  their  co-partnership  the  said  co-partners  each 
to  the  other,  shall  and  will  make  a  true,  just  and  final  account  of  all  things  relating  to  their 
said  business,  and  in  all  things  truly  adjust  the  same;  and  all  and  every  the  stock  and  stocks, 
as  well  as  the  gains  and  increase  thereof,  which  shall  appear  to  be  remaining,  either  in 
money,  goods,  wares,  fixtures,  debts  or  otherwise,  shall  be  divided  between  them 


Page  two  of  a  partnership  agreement 
73 


74         ECONOMICS  AND  THE  COMMUNITY 

The  Corporation 

The  greater  part  of  business  is  organized  to-day  by 
means  of  the  corporation.  The  corporation  is  an  associ- 
ation of  two  or  more  ])ersons  formed  and  authorized  by 
law  to  act  as  a  single  person  in  the  conduct  of  a  particular 
business.  .V  cori)oralion  is,  in  fact,  an  artificial  person. 
It  may  do  many  of  the  things  that  an  individual  may  do. 
It  may  contract  debts,  sue  and  he  sued  in  the  courts,  and 
may  enter  into  contracts  in  the  same  manner  as  an  indi- 
vidual. 

Kinds  of  Corporations 

There  are  public  corporations  and  private  corporations. 
Public  corporations  are  those  formed  for  government  pur- 
poses. The  city  is  a  public  corporation;  so  also  are 
counties,  townships,  school  districts,  and  drainage  dis- 
tricts, in  most  cases.  The  state  organizes  these  public 
corporations  to  carry  on  public  business.  The  private 
corporation,  with  which  we  are  especially  concerned  in 
this  chapter,  may  be  a  private  stock  corporation  organized 
for  profit,  or  a  non-stock  corporation  created  for  certain 
common  enterprises,  not  for  profit,  such  as  the  manage- 
ment of  churches,  clubs,  and  charitable  institutions. 

TJic  Private  Stock  Corporation 

The  private  stock  corporation  is  the  special  subject  of 
our  study  here.  It  is  the  form  most  commonly  meant 
when  the  term  corporation  is  used.  It  is  organized  to 
conduct  a  business.  Its  ow-nership  is  divided  among 
stockholders  in  proportion  to  the  number  of  shares  of 
stock  that  each  possesses.     Private  stock  corporations  are 


BUSINESS  ORGANIZATION 


75 


org^anized  under  state  or  national  laws.  They  receive  a 
charter  which  specifies  clearly  what  they  may  do.  Noth- 
ing can  Ix;  done  legally  which  is  not  provided  for  in  the 
charter.  The  charter  corresponds  to  a  constitution.  It 
is  the  form  of  organization  of  and  a  grant  of  powers  to 
the  corporation. 


.»-<  >-^  >-«.  >-*. 


1^ 


CAPITAL  STOCK  S  I  SOO  OOO  00 
SM*«f*S(00  00  (ACM 


FEDERAL  COMMERCIAL  COMPANY 

.  //tij  ^  rr/t///./  ////»/  ' '  //"  i'-/'-^'"^'/  /"  Mr,  // 

/////-  r»-«»./y///«/  '//' r/.  .JJA,  FE DERAL  COMMERCIAL  CO M P ANY.  J,',,'iA,M^  > /////  -  /' 


e^ 


-■■■ymi-'  i>_V| 


S/vwat- Jias.'  -•«»-  -v 


A  share  of  cuniiiiun  stuck 


Capital  Stock 

The  ownership  of  the  private  stock  corporation  is  rep- 
resented by  the  capital  stock,  r^ach  share  of  the  capital 
stock  represents  a  certain  portion  of  the  ownership.  A 
corporation  with  a  capital  stock  of  $io,ooo,  divided  into 
shares  of  $ioo  each,  would  have  one  hundred  shares. 
The  ownership  of  one  share  represents  one-hundredth  of 


yCi         ECONOMICS  AND  THE  COMMUNITY 

the  ownership  of  the  entire  corporation.  The  ownership 
of  fifty-one  shares  represents  a  majority  of  the  stock. 
Any  person  or  group  holding  fifty-one  per  cent  or  more 
of  the  stock,  therefore,  may  control  the  business  of  the 
corporation. 

Preferred  Stock 

Some  corporations  issue  preferred  stock,  which  is  given 
some  special  privileges,  A  certain  dividend  is  allowed 
to  the  preferred  stock,  and  this  dividend  must  be  paid 
before  any  dividends  are  allowed  on  the  common  stock. 
Preferred  stock  frequently  has  other  privileges  also,  such 
as  a  prior  claim  upon  the  assets  of  the  corporation  over 
that  of  the  common  stock,  if  the  corporation  fails.  The 
preferred  stock,  on  the  other  hand,  does  not  usually  share 
in  the  profits  of  the  corporation  beyond  the  specified 
dividend  allowed  it.  The  holders  of  preferred  stock  gen- 
erally have  no  voice  in  the  management  of  the  corpora- 
tion. The  common  stockholders  take  the  greater  risk 
and  may  receive  larger  returns  if  the  business  is  success- 
ful. They  are  more  likely  than  the  preferred  stockhold- 
ers to  lose  if  the  business  fails. 

Management  of  a  Corporation 

The  charter  of  the  corporation  granted  by  the  law  de- 
fines the  i>lan  of  organization  and  management.  The 
charter  fixes  the  number  of  directors,  their  term  of  office 
and  method  of  election.  The  directors  are  usually  elected 
annually  by  the  common  stockholders  from  among  the 
stockholders.    Each  person  casts  as  many  votes  for  direc- 


BUSINESS  ORGANIZATION 


n 


tors  as  he  has  shares  of  common  stock.  The  directors 
are  responsible  for  the  conduct  of  the  l)usiness  of  the 
corporation,  and  select  the  officers  who  conduct  its  affairs. 


Board  of   Directors'  meeting 

The  chief  officials  of  the  corporation  are  the  president, 
vice-president,  secretary,  and  treasurer.  The  charter  and 
by-laws  of  the  corporation  determine  the  duties  and 
powers  of  each  of  these  officials.  Usually  the  boards  of 
directors  of  a  corporation  elect  a  general  manager  for 
the  work  of  actually  organizing  and  running  the  business 
in  which  they  are  engaged. 


yS        ECONOMICS  AND  THE  COMMUNITY 

Advantages  of  Corporations 
The  corporate  form  of  business  organization  permits 
many  people  to  invest  in  a  business  who  would  not  them- 
selves be  able  to  organize  a  business  or  engage  in  a  part- 
nership. People  of  small  means  are  thus  given  a  chance 
to  participate  in  business  organization  and  management 
by  the  ownership  of  one  or  more  shares  in  a  corpora- 
tion. Each  investor  risks  only  the  amount  that  he  puts 
into  the  business,  except  in  some  instances,  such  as  bank 
corporations,  where  the  stockholders  are  liable,  if  the 
bank  should  fail,  for  twice  the  amount  of  their  invest- 
ment. 

It  is  easier  to  induce  people  to  engage  in  business 
through  the  purchase  of  shares  of  stock  when  their  lia- 
bility is  limited  to  the  amount  invested.  A  corporation 
brings  together  small  amounts  from  many  sources  and 
thus  increases  the  capital  engaged  in  business  enterprises. 
The  cor])oration  has  another  great  advantage  in  that  it 
is  a  permanent  body.  The  death  of  an  individual  owner 
or  a  partner  may  compel  the  reorganization  or  sale  of  a 
business.  Death  of  .stockholders  or  officers  does  not  afTect 
the  corporation.  The  stock  may  be  transferred  to  others 
and  new  oflficers  may  l>e  elected. 

Disadvantages  of  the  Corporation 
One  of  the  chief  disadvantages  of  the  corporation  is 
that  the  owners  of  the  stock  do  not  actually  manage  the 
business.  They  must  hire  others  to  do  this.  There  is 
not,  in  consequence,  the  personal  interest  that  there  is  in 
the  case  of  the  individual  owner  or  the  member  of  a  firm 
cr  partnership. 


BUSINESS  ORGANIZATION  79 

Corporations  are  sometimes  promoted  Ijy  individuals 
for  personal  ^^ain  and  abuses  frequently  occur.  The 
capital  stock  in  many  instances  is  much  greater  than  the 
fair  value  of  the  business.  Purchasers  of  the  stock  are 
thus  defrauded.  Corporations  are  frequently  over-capi- 
talized, the  excess  being  known  as  "watered"  stock.  Pub- 
lic control  is  necessary  to  prevent  such  fraud  and  unfair 
practices. 

It  is  the  abuse  of  corporations  that  brings  criticism 
rather  than  corporate  organization  itself.  Modern  busi- 
ness could  scarcely  Ije  organized  on  so  complete  a  scale 
if  it  were  not  for  the  corporation.  Just  as  the  partnership 
was  necessary  in  earlier  times  to  undertake  enterprises 
too  big  for  the  individual,  so  is  the  corporation  neces- 
sary to-day  to  undertake  enterprises  too  large  for  either 
the  individual  or  the  partnership. 

Cooperative  Organisation 

Another  form  of  business  organization  rapidly  coming 
into  use  is  the  cooperative  form.  This  subject  is  dis- 
cussed more  fully  in  a  later  chapter.  At  this  point  we 
are  concerned  with  it  as  a  means  of  organization  to  con- 
duct a  business. 

A  cooperative  organization  is  a  union  of  many  people 
to  produce  or  exchange  goods  to  supply  the  needs  of  the 
cooperators.  It  takes  the  form  largely  of  an  organiza- 
tion for  the  purchase  or  sale  of  goods.  Farmers,  dairy- 
men, and  fruit-growers  having  a  common  need  for  facili- 
ties for  marketing  their  products  form  a  cooperative  so- 
ciety to  build  storage-elevators  and  warehouses,  or  to 
handle  the  sales  of  their  products.     Consumers  sometimes 


8o 


ECONOMICS  AND  THE  COMMUNITY 


fonn  cooperative  stores  to  purchase  the  necessaries  of  Hfe, 
In  a  cooperative  plan  the  whole  group  of  people  to 
be  served  become  the  organizers.  They  generally  act 
for  convenience  through  a  special  form  of  corporation 
rather  than  as  partners.  The  purpose  behind  cooperative 
organization  is  to  bring  the  producer  and  consumer  more 
closely  together,  and  thus  give  larger  returns  to  the  pro- 
ducer and  eliminate  some  of  the  expense  in  supplying 
the  consumer's  needs. 


A  Public  Enteki-kise 
N.  Y.  City  water  supply  dam  at  Croton,  N.  Y. 

Public  Ownership 
Instead  of  the  organization  of  enterprises  by  individ- 
uals, partnerships,  corjjorations,  or  cooperative  societies, 


BUSINESS  ORGANIZATION  8i 

the  people,  actinj;  ihroiit^h  their  j^overnnient,  sometimes 
undertake  to  organize  and  manage  certain  enterprises. 
Highways,  streets,  schools  and  sewage  and  refuse  dis- 
posal are  universally  organized  and  managed  by  the 
people.  Waterworks,  electric-light  and  gas  plants,  docks, 
wharves,  and  warehouses  are  sometimes  owned  and  oper- 
ated by  the  people  of  cities.  Drainage  and  irrigation  are 
government  enterprises  principally.  The  post-office,  with 
its  parcel  post  and  postal  savings  bank,  is  organized  and 
run  by  the  national  government.  Canals  are  government 
undertakings.  The  railroads  were  operated  by  the  gov- 
ernment during  the  war.  ]Many  other  enterprises  in  war- 
time were  organized  and  managed  through  government 
agencies.  In  public  ow^nership  and  management  the 
people,  as  a  whole,  unite  through  their  government  to 
take  the  place  of  the  business  organizer. 

Internal  Organization  of  a  Business 

What  about  the  details  of  organization  by  which  the 
business  conducted  by  individuals,  partnerships,  or  cor- 
porations is  carried  on? 

In  small  enterprises  the  individual  owner,  the  partners, 
or  the  officers  of  the  corporation  carry  on  the  business 
without  much  organization.  The  farmer  and  the  shop- 
keeper manage  their  business  personally,  employing  such 
managers,  foremen,  or  labor  as  may  be  necessary.  The 
partners  and  corporation  officers  in  small  business  usual- 
ly divide  the  work,  each  taking  charge  of  a  certain  part. 

Large  business  enterprises  can  not  be  conducted  with- 


82         ECONOMICS  AND  THE  COMMUNITY 

out  an  organization  that  clearly  divides  the  work  to  be 
done  and  fixes  the  responsibility  upon  some  one  to  do 
each  part.  The  head  of  a  large  store  or  manufacturing 
plant  can  not  give  attention  to  the  many  details  of  the 
business.  Success  depends  upon  the  ability  of  the  head 
of  the  business  to  organize  departments  and  select  capable 
managers. 

Departments  of  a  Business  Organi::at{on 

The  main  dc]jartnients  into  which  large  business  enter- 
prises are  organized  are : 

Administration ; 

Production ; 

Employment ; 

Sales ; 

Accounting. 

The  administration  department  includes  the  general 
planning  of  the  business  and  the  executive  direction  of 
the  work.  Problems  of  securing  finances  to  conduct  the 
business  are  handled  by  this  department.  The  heads  of 
the  business  usually  conduct  this  department. 

The  production  department  comprises  the  actual  proc- 
esses by  which  raw  materials  are  transformed  into  manu- 
factured articles.  It  includes  the  workmen,  foremen,  and 
superintendents,  who  actually  do  the  physical  work  of 
the  enterjjrise. 

The  employment  department  has  charge  of  the  selec- 
tion of  employees  and  their  control.  In  enterprises  where 
special  skill  is  required  the  emj)loyment  department  is  of 
very  great  importance.     Many  enterprises  require  special 


BUSINESS  ORGANIZATION 


83 


physical  fitness.     Some  enterprises  require  physical  exam- 
ination  before   employment. 

The  sales  department  disposes  of  the  product  to  the 
wholesalers,  retailers,  or  consumers.  This  department 
includes  the  sales  office  force,  advertising  staff,  and  sales- 
men. 


Employment  department  of  an  industry 


The  accounting  department  has  to  do  with  the  keep- 
ing of  the  books  and  financial  accounts,  and  the  collection 
and  payment  of  accounts. 

The  foregoing  organization  of  business  may  be  illus- 
trated in  the  case  of  a  corporation  by  the  following  dia- 
gram. 


84        ECONOMICS  AND  THE  COMMUNITY 
Diagram  of  Corporate  Business  Organisation 


StocklioUkrs 


Board  of  Directors 


CMVicers  of  the  Corporation 


General   Manager 


Departments 


Administration 

Production 

Emplojment 

Sales 

Accounting 

Questions  and  Problems 

1.  Are  partnerships  common  in  your  community  among 

lawyers,    physicians,    merchants    or    other   business 
men  ? 

2.  Discuss  fully  the  advantages  of  the  partnership  over 

the  individual  organizer. 

3.  What  are  the  weaknesses  of  the  partnership  plan? 

4.  Define  a  corporation  in  your  own  language. 

5.  What  is  meant  by  the  terms  "common   stock,"  "pre- 

ferred stock,"  "dividends"? 

6.  What  are  the  advantages  of  the  corporation  over  the 

partnership  or  the  individual  organizer? 

7.  What   are  the   weaknesses  of  the  corjjorate   form  of 

organization  in  securing  the  interest  of  the  managers? 

8.  Why  should  corporations  be  subject  to  public  control? 

9.  Why  should  the  amount  of  stock  issued  by  a  corpora- 

tion be  regulated  by  the  public? 


BUSINESS  ORGANIZATION  85 

10.  What  are  the  objects  that  induce  men  to  organize  a 

business,  either  as  an   individual,   partnership   or  a 
corporation  ? 

11.  Does  the  corporation  give  any  advantage  to  the  small 

investor?    What  disadvantages  are  there  to  the  small 
investor  ? 

12.  What  advantages  does  the  cooperative  plan  of  organ- 

ization have  over  the  individual,  the  partnership,  or 
the  corporate  organization? 

13.  What  advantages  and  disadvantages  come  from  organ- 

izing business  under  public  management? 

14.  Why   is  it   necessary  to  organize  a  large  business  in 

departments  ? 

15.  What  are  the  principal  departments  of  a  large  business 

organization?     Explain  each. 

References 

Sparling,  Business  Or(jamzation,  Chapters  i,  2  and  3. 
Briscoe,  Economics  of  Business. 


CHAPTER  VI 

TRANSPORTATION 

Cammunity  Survey 

1.  Upon  what  means  of  transportation  is  your  community 

dependent  to  get  its  products  to  market? 

2.  Upon  what  means  of  transportation  is  your  community 

dependent  to  provide  goods  for  its  needs? 

3.  \\'hat  kinds  of  roads  and  streets  are  built? 

4.  Are  motor  trucks  extensively  used? 

We  have  discussed  briefly  the  part  that  transportation 
plays  in  the  distribution  of  goods,  and  we  have  seen  how 
business  depends  upon  it.  We  will  now  take  up  the 
subject  in  greater  detail. 

hnportancc  of  Transportation 

The  history  of  transportation  is  the  history  of  civili- 
zation itself.  The  degree  to  which  a  country  has  de- 
veloped means  of  transportation  is  a  fair  measure  of  the 
civilization  of  that  country.  Without  transportation  con- 
sumers could  get  few  of  the  comforts,  and  would  be 
deprived  of  some  of  the  necessities  of  modern  life.  The 
jjroducer  would  produce  in  vain,  excei)t  for  his  own  needs, 
if  he  could  not  readily  have  his  products  transported  to 
the  consumer. 

Location,  with  respect  to  facilities  for  transportation, 
is  important  to  all  producers.     A   factory  situated  at  a 

86     • 


TRANSPORTATION  87 

distance  from  a  railroad  affords  an  example  of  defective 
transportation.  Farm-land  situated  at  a  distance  from 
means  of  transportation  has  a  smaller  relative  value. 
Great  tracts  of  mining,  agricultural,  and  timber  lands 
lie  useless  for  lack  of  transi)ortation.  That  is  why 
the  people  sometimes  undertake  to  build  railroads  at 
public  expense — such,  for  example,  as  the  Alaskan  Rail- 
way. Improved  transportation  quickens  the  pulse  of 
business  life.  Civilization  has  advanced  and  will  con- 
tinue to  advance  along  the  routes  of  transportation. 

The  early  routes  of  travel  were  by  water.  People, 
therefore,  developed  the  lands  and  other  resources  close 
to  the  rivers,  lakes,  and  seas.  Transportation  was  slow 
and  dangerous  and  was  confined  principally  to  goods  of 
small  bulk.  Each  community  depended  largely  upon  its 
own  immediate  surroundings  for  the  more  important 
goods,  such  as  food-stuffs.  The  early  trade  routes  from 
Europe  to  the  East  Indies  were  primarily  used  to  bring 
expensive  spices,  silks,  and  similar  goods  from  the 
Orient.  Yet  even  these  trade  routes  for  transportation 
of  supplies  of  limited  use  were  of  extreme  importance  to 
many  cities.  It  will  be  remembered  that  Columbus  sought 
a  water  route  to  India,  not  merely  to  prove  that  the 
world  was  round,  but  also  because  the  trade  route  to  the 
East,  upon  which  his  native  Genoa  depended  for  her  busi- 
ness life,  had  been  closed  by  the  Turks. 

Even  as  late  as  the  beginning  of  the  nineteenth  century 
the  settled  portions  of  the  United  States  were  to  be  found 
principally  along  the  water  routes.  Only  a  few  adven- 
turous pioneers  had  gone  out  to  settle  in  the  interior  be- 
yond the  routes  of  water  transportation. 


88        ECONOMICS  AND  THE  COMMUNITY 

Highways 

The  development  of  highways  capable  of  extensive 
transportation  was  slow  throughout  the  world.  The 
Roman   Empire   bound   its   provinces  together   by  good 


Old  Appian  Way,  Rome 

roads.  These  roads  were  developed  ])rimarily  for  mili- 
tary purposes ;  the  idea  of  trade  was  secondary.  Vehicles 
for  transport  were  crude  and  unsuited  to  any  great 
volume  of  trade.  It  remained  virtually  until  the  era 
of  the  railway  before  interior  transportation  became 
important. 


TRANSPORTATION  89 

In  this  country  highways  were  built  on  an  extensive 
scale  by  private  enterprise.  The  owners  charged  a  "toll," 
and  the  roads  were  known  as  toll  roads.  In  due  time 
all  toll  roads  were  taken  over  as  public  enterprises.  There 
are  now  about  two  and  a  half  millions  of  miles  of  free 
public  highways  in  the  United  States.  The  volume  of 
traffic  that  passes  over  these  highways  exceeds  by  far 
that  passing  over  the  railroads.  It  is  consequently  im- 
portant that  attention  should  be  paid  to  the  character  of 
the  roads.  If  the  roads  are  poor,  transportation  over 
them  is  expensive.  The  better  the  roads,  the  lower  the 
cost  of  getting  goods  to  market.  Improved  roads  of 
macadam,  concrete,  and  brick  greatly  reduce  the  cost  of 
transportation.  It  has  been  estimated  that  the  cost  of 
transportation  over  unimproved  dirt  roads  is  about 
twenty-five  cents  per  ton  per  mile.  The  cost  of  transpor- 
tation over  improved  roads  is  less  than  ten  cents.  The 
saving  in  the  transportation  of  a  billion  tons  for  an  aver- 
age haul  of  five  miles  would  therefore  be  $750,000,000. 

It  is  estimated  that  about  one-eighth  of  the  roads  of 
this  country  are  improved.  These  roads  carry  the  bulk 
of  the  entire  traffic,  and  have  made  possible  great  re- 
ductions in  the  cost  of  getting  goods,  especially  farm 
products,  to  market. 

The  United  States  started  early  to  build  national  high- 
ways to  link  up  with  the  East  the  country  west  of  the 
Alleghanies;  but  as  means  of  long-distance  transporta- 
tion the  highways  remained  an  unimportant  factor  until 
the  coming  of  the  automol)ile  and  the  motor-truck.  At 
present  a  great  campaign  for  better  roads  is  being  waged 
all  over  the  country.     The   federal  government  has  re- 


Development  of  transportation 
90 


I  'ovclopment   i>i    tran-; 
91 


(  cciiitimu  ij 


92        ECONOMICS  AND  THE  COMMUNITY 

spondee!  by  making  large  grants  of  money  to  aid  the  states 
in  building  improved  roads. 

Canals 

It  was  natural  that  the  early  settlers,  accustomed  to 
water  transportation,  should  develop  the  idea  of  the 
canal.  In  order  to  reach  the  interior,  canal  projects  were 
planned  early  in  the  last  century.  New  York,  Pennsyl- 
vania, and  Ohio  had  extensive  systems  of  canals  already 
constructed  l)efore  the  era  of  the  railroad.  The  famous 
Erie  Canal  tapped  great  resources  of  raw  materials  and 
opened  uj)  the  way  from  New  York  to  the  Great  Lakes 
and  the  West.  Economic  development  followed  at  a  rapid 
rate.  Cities  grew  up  along  the  line.  Canals  connecting 
with  the  Erie  Canal  were  extended  into  regions  that  sup- 
plied raw  materials.  The  Erie  Canal  became  the  central 
artery  of  a  great  system  of  waterways.  If  the  railroad 
had  not  been  made  practicable  for  another  fifty  years, 
canals  w'ould  probably  have  been  constructed  to  reach  a 
large  part  of  the  economic  resources  of  the  Eastern 
states. 

The  importance  of  the  canal  is  still  apparent.  The 
Welland  Canal,  connecting  Lakes  Erie  and  Ontario,  the 
Cape  Cod  Canal,  the  Sault  Sainte  Marie,  the  Panama 
and  Suez  canals  are  very  important  agencies  of  transpor- 
tation. The  new  Barge  Canal  in  New  York  state,  from 
Buffalo  to  the  Hudson,  may  also  be  a  very  influential  trade 
factor.  Other  proposed  canals  of  importance  are  the 
routes  from  Lake  Michigan  to  the  Mississippi  and  the 
Gulf,  and   from  the  southern  end  of  Lake  Michigan  to 


TRANSPORTATION  93 

Lake  Erie,  and  the  Intercoastal  Canal  along  the  Atlantic. 
As  a  means  of  reaching  interior  |)()ints,  however,  the  canal 
is  no  longer  considered,  and  most  of  the  canals  constructed 
for  that  purpose  have  been  abandoned.  The  railroad  has 
superseded  the  canal   for  interior  transportation. 

TJic  Steamboat 

In  the  early  part  of  the  last  century  the  steamboat  was 
mvented.  This  invention  revolutionized  and  quickened 
transportation  all  over  the  world.  Instead  of  depending 
upon  the  slow,  uncertain  sailing-vessel,  traders  could  now 
bring  goods  long  distances  quickly  and  with  greater  regu- 
larity and  safety.  The  contrast  between  the  modern 
steamship,  crossing  the  Atlantic  in  less  than  five  days,  and 
the  old  sailing-craft,  which  took  several  weeks,  gives  a 
fair  indication  of  the  way  in  which  transportation  by 
water  has  been  affected. 

The   Railroad 

The  railroad  further  revolutionized  the  world's  trans- 
portation. It  furnished  the  necessary  link  to  connect 
producers  everywhere  with  the  markets  of  the  world.  It 
made  possible  the  shipment  of  bulky  food-stuffs,  coal, 
iron  ore,  and  lumber.  The  railroad  enabled  settlers  to 
press  farther  back  into  the  interior.  Resources  of  mines 
and  forests  that  had  l)een  beyond  reach  were  now  opened, 
and  the  process  has  been  extending  rapidly  into  the  re- 
motest sections  of  the  world. 

In  1830  there  were  twenty-three  miles  of  railroad  in 
the  United  States.       In  1920  there  were  about  two  hun- 


94        ECONOMICS  AND  THE  COMMUNITY 

(Ired  and  seventy-five  thousand  miles  in  operation.  In 
the  early  sixties  the  government  subsidized,  by  the  grant 
of  lands,  the  building  of  a  railroad  to  the  Pacific  coast. 
Since  then  several  lines  of  railway  have  been  built  across 
the  continent.  The  economic  result  has  l^een  that  vast 
areas  of  fertile  lands  in  the  United  States  and  Canada 
have  been  opened  up.  The  United  States  is  now  engaged 
in  the  building  of  a  railroad  into  the  interior  of  Alaska. 
This  railroad  will  reach  the  mineral  and  forest  resources 
in  that  territory. 

We  get  some  idea  of  the  world-wide  effect  of  economic 
forces  from  the  fact  that  the  opening  of  the  fertile  West- 
ern lands  by  means  of  the  railroad  greatly  decreased  land 
values  in  the  Eastern  states,  and  even  caused  disaster  to 
farmers  in  England  and  on  the  continent  of  Europe.  The 
Eastern  and  European  farmers  could  not  compete  with 
the  farmers  on  the  fertile  but  inexpensive  soil  of  the 
West. 

The  political  significance  of  transportation  is  seen  in 
the  fact  that  the  building  of  railroads  to  Illinois,  Wis- 
consin, Minnesota,  and  Iowa  before  the  Civil  War  linked 
those  states  by  trade  routes  to  the  East,  and  took  away 
their  dependence  upon  the  water  route  down  the  Missis- 
sippi. By  this  means  the  trade  interests  of  these  states 
were  linked  with  the  North  instead  of  with  the  South  at 
the  time  of  the  Civil  War. 

The  electric  railroad  is  the  most  recent  development 
in  railway  transportation.  It  has  created  an  effective 
means  for  the  carriage  of  goods  and  j^eople  into  many 
rural  regions,  and  has  linked  cities  and  towns  more 
closely  with  the  great  railroad  centers. 


TRANSPORTATION  95 

The  Motor  Truck 

The  building  of  good  roads  and  the  perfecting  of  the 
motor-car  brought  another  new  era  in  transportation. 
We  are  now  at  the  beginning  of  this  era.  MilHons  of 
passenger-cars  are  in  use.  Motor  routes  for  the  carriage 
of  passengers  and  freight  have  been  developed  to  supple- 
ment the  steam  and  electric  railways.  Remote  sections 
of  the  country  are  brought  closer  together,  and  sections 
formerly  isolated  are  now  in  close  touch  with  the  centers 
of  trade  and  transportation. 

The  development  of  the  motor-truck  bids  fair  to  revo- 
lutionize transportation.  Short  hauls  are  now  being 
made  principally  by  truck.  It  is  an  economical  method 
because  it  eliminates  the  extra  loading  and  unloading  of 
freight-cars.  Since  a  great  part  of  hauling  is  for  short 
distances,  the  truck  is  destined  to  fill  an  important  place. 

The  Post-0 ffice 
The  transportation  of  written  messages  has  long  been 
an  essential  part  of  social  and  commercial  life.  One 
could  scarcely  imagine  a  civilized  country  without  a  postal 
service.  Business  would  be  badly  hampered  if  it  were 
not  for  the  post-office.  Business  would  be  badly  hampered 
also  if  the  cost  of  the  postal  service  were  excessive.  Social 
life  would  Ije  dreary  without  means  of  communication  by 
letter.  In  all  civilized  countries  the  post-office  is  a  func- 
tion of  government.  The  postal  system  of  the  United 
States  was  organized  long  before  the  Revolution,  Benja- 
min Franklin  being  one  of  the  earliest  postmaster-gener- 
als. It  has  been  conducted  by  the  federal  government 
since  the  beginning  of  this  nation. 


96 


ECONOMICS  AND  THE  COMMUNITY 


At  the  present  time  the  mail  is  carried  by  various  con- 
veyances to  the  remotest  parts  of  the  country  and  dis- 
tributed by  means  of  the  railway  mail  service,  the  rural 
delivery,  city  delivery,  and  the  post-office.  The  prime 
object  of  the  postal  system  is  service,  not  profit.     So  use- 


Sortinp  mail  in  a  large  post  office 


ful  is  the  ])ost-office  that  it  is  deemed  wise  to  make  the 
rates  as  low  as  possible.  Letters  are  carried  to  any 
part  of  the  country  and  to  Canada  and  England  for  two 
cents.  A  strong  movement  is  on  foot  to  reduce  letter 
postage  to  one  cent,  in  the  belief  that  cheap  postage 
promotes  business  as  well  as  education. 

So  important  is  the  postal  system  deemed  to  be  that 


TRANSPORTATION  97 

an  international  postal  union  has  Ijeen  established,  by 
agreement  between  the  leading  commercial  nations,  to 
facilitate  the  forwarding  of  letters  to  foreign  countries. 

The  Telegraph  and  Telephone 
The  transportation  of  intelligence  by  means  of  the 
telegraph,  telephone,  and  wireless  has  l^ecome  a  factor 
of  great  importance  to  business  in  recent  years,  and  is 
likely  to  increase  greatly  in  importance  in  the  future.  A 
large  part  of  the  world's  business  is  transacted  by  the 
telegraph  and  the  telephone.  These  agencies  supplement 
the  post-office  for  (juick  service,  and  business  men  have 
come  to  rely  upon  them  in  important  transactions. 

The  telegraj)h  and  telephone  are  conducted  by  private 
enterprise  in  this  country,  but  in  Europe  they  are  generally 
conducted  by  the  government  as  a  part  of  the  postal 
system. 

The  Parcel  Post 

The  postal  system  also  undertakes  to  transport  parcels 
of  limited  size  from  place  to  place.  This  is  done  as  a 
part  of  the  regular  postal  service  by  the  same  organiza- 
tion of  railway  mail,  rural  delivery,  city  delivery,  and 
post-office.  The  country  is  divided  into  zones,  and  the 
rates  are  fixed  according  to  the  number  of  zones  from 
one  place  to  another, 

A  great  business  has  grown  up  in  this  part  of  the  postal 
work.  The  marketing  of  food-stuffs  directly  from  pro- 
ducer to  consumer  has  been  carried  on  in  many  places 
by  means  of  the  parcel  post.  The  easy  access  to  the  pos- 
tal stations  or  the  mail-carriers  makes  the  use  of  the 
parcel  post  convenient  for  everybody. 


98        ECONOMICS  AND  THE  COMMUNITY 

Express  and  Special  Freight 

Private   enterprise   has   developed   specially   organized 

systems  of  transporting  and  delivering  goods  by  means  of 

express    and    special    freight.      Express    companies    are 

agencies  that  make  a  business  of  handling  goods,  usually 


Refrigerator  car 

of  small  bulk.     They  collect  and  deliver  parcels  and  hire 
the  railroads  to  haul  their  cars. 

Special  fast  freight  lines  are  organized  to  forward 
certain  kinds  of  freight.  Refrigerator  lines  are  operated 
to  carry  goods  requiring  cold  storage.  These  special 
freight  lines  facilitate  the  transportation  and  delivery  of 
goods,  and  particularly  aid  in  the  marketing  of  perishable 
goods. 


TRANSPORTATION  99 

Air  Transportation 

The  success  of  the  airplane  in  the  war  and  its  increased 
efficiency  as  a  carrier  caused  the  extension  of  its  service 
to  peace  times.  The  first  use  was  made  in  transporting 
mails.  The  first  route  in  the  United  States  was  inaugur- 
ated between  Washington  and  New  York  in  191 7.  The 
success  of  this  venture  caused  the  estabHshment  of  other 
routes  between  New  York  and  Cleveland,  Chicago,  and 
other  points.  The  speed  of  the  airplane  cut  down  the 
time  from  New  York  to  Chicago  to  less  than  one-third 
of  that  required  in-  the  fastest  trains.  For  some  time 
the  airplane  will  doubtless  be  limited  in  its  use  to  the 
carriage  of  mail  and  packages  of  small  bulk,  although  air 
routes  for  passenger  traffic  and  express  have  already  been 
projected. 

Transportation  Rates 

The  rates  charged  for  transportation  have  always  been 
a  matter  of  great  concern  to  producers  and  consumers. 
The  people  have,  therefore,  for  many  years  taken  an 
active  part  in  fixing  by  law  the  rates  charged  by  car- 
riers. The  amount  of  toll  on  toll  roads  and  bridges  was 
usually  fixed  In-  law  or  contract.  Finally  the  people  took 
over  the  roads  and  bridges  and  made  them  free.  From 
the  beginning  the  post-office  has  been  conducted  at  or  be- 
low cost.  The  rates  of  street  railways  are  usually  fixed 
by  contract  or  are  regulated  by  law  or  by  official  com- 
missions. Railroad  rates  are  fixed  by  public  bodies.  The 
principle  has  been  established  that  a  service  so  necessary 
to  the  people  should  l^e  conducted  at  reasonable  rates. 


loo      ECONOMICS  AND  THE  COMMUNITY 

Discriminations 

One  of  the  evil  practices  that  grew  up  in  transportation 
systems  was  the  granting  of  special  rates  and  favors  by 
carriers  to  certain  producers  or  consumers.  This  prac- 
tice is  known  as  discrimination.  One  of  the  basic  prin- 
ciples of  democracy  is  that  all  persons  shall  be  treated 
alike.  Discrimination  cannot  be  tolerated  in  any  service 
that  is  public  or  scmi-pul)lic  in  character.  Discrimination 
has  been  used  to  build  up  certain  industries  and  to  destroy 
others.  Two  compettors  are  not  on  an  equal  footing 
when  one  gets  a  better  railway  rate  than  the  other,  or 
when  one  receives  favors  not  granted  to  the  other.  This 
evil  has  been  so  serious  and  so  contrary  to  the  sense  of 
fair  dealing  that  laws  have  been  passed  prohibiting  it. 
The  Interstate  Commerce  Commission  and  the  State  Rail- 
way and  Public  Utility  Commissions  have  been  given 
power  to  prevent  discrimination  of  all  kinds. 

Discrimination  between  certain  cities  or  communities 
has  had  a  similar  effect  on  a  wider  scale.  The  transpor- 
tation systems,  by  giving  special  rates  or  service  to  a  city, 
give  advantages  to  the  business  enterprises  of  that  city 
over  enterprises  of  other  cities.  If  the  rate  from  Pitts- 
burgh to  New  York  is  materially  lower  than  that  from 
Pittsburgh  to  IJaltimore,  the  traffic  will  tend  to  go  to 
New  York,  while  Baltimore  will  suffer,  and  vice  versa. 

Failure  to  give  equitable  rates  and  service  has  handi- 
capped many  cities.  Cincinnati  built  a  railroad  into  the 
South  as  a  public  enterprise  to  maintain  its  trade.  Each 
city  and  community  should  study  the  problem.  Many 
cities  are  doing  so  through  the  traffic  divisions  of  their 


TRANSPORTATION  loi 

chambers  of  commerce  or  boards  of  trade.  Fair  practice 
affecting  communities  are  even  more  important  than 
those  affecting  individuals  or  single  industries. 

Rebates 

When  discrimination  was  prohibited,  attempts  w^ere 
made  to  evade  the  law  by  collecting  the  full  amount  from 
each  and  then  returning  a  part  to  the  favored  ones.  This 
practice  was  called  rebating.  The  result  was  the  same 
as  if  different  rates  were  charged  in  the  first  place.  This 
practice  was  finally  condemned  by  law  and  the  Interstate 
Commerce  Commission  and  State  Railway  Commissions 
were  given  special  powers  to  enforce  the  laws  against  the 
practice. 

Discriminations  and  rebates  have  been  generally 
stopped  in  this  country.  The  sense  of  fair  dealing  con- 
demns these  practices  as  inconsistent  in  a  country  where 
fair  play  and  the  square  deal  are  the  goals  of  the  people's 
efiforts. 

Public  Regulation 

To  insure  fair  service  at  reasonable  rates,  the  people 
have  passed  laws  and  have  set  up  boards  and  commis- 
sions to  investigate  and  regulate  rates  and  service  of 
transportation  companies.  The  Interstate  Commerce 
Commission  was  established  in  1887  to  control  the  rates 
and  service  of  railroads  that  do  an  interstate  business. 
This  commission  has  been  given  broader  powers  from 
time  to  time,  jiarticularly  in  1906,  and  has  exercised  great 
power  and  influence.  When  the  railroads  were  restored 
to  private  ownership  in  1920  further  and  enlarged  powers 
of  regulation  were  given  to  the  commission. 


I02       ECONOMICS  AND  THE  COMMUNITY 

The  states  have  also  created  commissions  or  boards  to 
regulate  rates  and  service  of  railroads  within  their  bor- 
ders. In  many  states  in  recent  years  these  commissions 
have  been  enlarged  and  placed  in  control  of  all  forms 
of  public  utilities  such  as  street  railways,  gas,  electric- 
light,  water,  and  power  companies. 


©  I).  «  u. 

The   Interstate   Commerce  Commission  in   session 

Future  of  Transportation 

Transportation  in  the  future  will  play  an  increassing 
part  in  the  country's  trade.  Each  day  adds  to  our  re- 
liance upon  transportation  facilities  to  get  the  goods  we 
want  and  are  accustomed  to  use.  This  fact  is  brought 
home  every  time  an  interruption  of  transportation  occurs. 
Large  cities  may  \)t  reduced  to  want  in  a  few  days  by  the 
failure  of  railway  or  delivery  service.  The  effect  of  a 
transportation  tie-up  extends  to  all  parts  of  the  economic 


TRANSPORTATION  103 

system.  Factories  soon  begin  to  close  for  want  of  ma- 
terials, men  are  thrown  out  of  employment,  and  food 
becomes  scarce. 

The  railroad  of  the  future  will  be  our  chief  reliance, 
as  it  is  at  present ;  but  we  shall  also  be  dependent  upon 
water  transportation  on  canals,  rivers,  and  oceans.  The 
motor-truck  will  fill  a  large  place  in  the  system  of  trans- 
portation for  short  hauls,  and  the  airplane  will  become 
an  important  means  of  transit  where  speed  in  the  deliv- 
ery of  small  bulk  is  a  factor.  Increasing  attention  will 
be  paid  to  the  development  of  an  American  merchant 
marine  to  insure  the  shippers  of  this  country  of  a  means 
of  reaching  the  markets  of  the  world  effectively  and  with- 
out discrimination. 

The  increasing  reliance  of  the  people  upon  transpor- 
tation for  the  necessaries,  comforts,  and  luxuries  of  life 
will  cause  constant  efforts  to  be  made  to  insure  the  ful- 
lest service  at  the  most  reasonable  rates  to  all  through 
public  regulation  or  ownership. 

Questions  and  Problems 

1.  Discuss  the  relative  importance  of  the  railways  and 

canals  as  means  of  transportation. 

2.  Discuss  the  relative  importance  of  the  highway  in  the 

scheme  of  transportation. 

3.  What  developments  have  occurred  in  the  use  of  the 

motor  truck  in  your  community  ? 

4.  Make  investigation  of  the  system  of  transportation  by 

express  in  your  community,  including  rates  charged, 
system  of  delivery,  and  arrangements  with  railroads 
to  carry  express. 

5.  Make  investigation  of  the  parcel  post  system,  including 

rates,  zones,  kinds  of  goods  allowed,  marketing  of 
farm  products  by  parcel  post,  etc. 


I04      ECONOMICS  AND  THE  COMMUNITY 

6.  Why  sliould  the  postal  system  he  hased  upon  the  idea 

of   service?     Should   parts   of   the  system   such  as 
rural  delivery  be  conducted  even  at  a  loss  ? 

7.  Why  are  rates  in  transportation  fixed  by  law,  while 

the  prices  of  most  goods  and  services  are  unregu- 
lated ? 

8.  Explain  fully  the  nature  of  discrimination  and  rebating. 

9.  Make  further  investigation  to  learn  the  scope,  purpose, 

and  work  of  the  Interstate  Commerce  Commission 
and  the  State  Railroad  Commission  or  Public  Utility 
Commission. 
10.     Why  will  transportation  systems  become  increasingly 
important  ? 

References 

Sharfman,  The  .■Imerican  Railroad  Problem. 
Fetter,  Modern  Economic  Problems,  Chapters  28-29, 
Interstate  Commerce  Commission,  Annual  Report. 
State  Public  Service  Commission  or  Railroad  Commission, 
Annual  or  Biennial  Report. 


CHAPTER  VII 

COMPETITION   AND   MONOPOLY 

Community  Survey 

1.  Make  a  complete  list  of  all  of  the  sources  from  which 

the  people  of  }Our  community  buy  the  principal 
products  which  they  use,  as  for  example  food,  cloth- 
ing, farm  implements. 

2.  Find  out  all  of  the  cases  where  prices  are  fixed  by  law 

or  services  are  regulated,  such  as  for  gas,  water, 
electric  light. 

3.  What  examj^les  can  you  find  of  the  control  of  the  sale 

of  products  which  people  need,  by  one  concern  or 
a  small  group? 

Business  is  conducted  on  the  competitive  or  on  the 
monopolistic  plan,  or  a  combination  of  the  two.  Compe- 
tition means  that  there  is  a  contest  on  the  part  of  sellers 
to  sell  their  goods  or  services  or  on  the  part  of  buyers 
to  buy  for  their  needs.  Monopoly  means  that  one  con- 
cern or  a  number  of  concerns,  acting  together,  control 
so  large  a  part  of  the  sales  of  a  given  article  or  service 
that  they  have  power  to  determine  the  price  to  be  paid 
and  the  quality  of  the  goods  or  service.  Generally  speak- 
ing, the  bulk  of  business  is  carried  on  by  a  combination 
of  the  competitive  and  monopolistic  plan. 

Competition  of  Sellers 
Let  us  trace  the  competitive  method  in  the  sale  of  a  suit 
of  clothes.    Let  us  suppose  that  we  purchased  a  suit  from 

105 


io6       ECONOMICS  AND  THE  COMMUNITY 

a  local  clothier.  We  might  have  purchased  it  from  any 
one  of  a  dozen  other  clothiers,  or  from  a  mail-order 
house.  \\'c  might  also  have  had  it  made  to  measure  by  a 
local  tailor.  All  of  these  sellers  were  in  competition  for 
the  sale  of  clothes.  Back  of  these  sellers  were  the  whole- 
sale dealers,  competing  with  each  other  for  the  sale  of 
suits  to  the  merchant  or  the  mail-order  house.  Back  of 
the  wholesalers  were  the  manufacturers,  competing  for 
orders  from  the  wholesalers.  Back  of  the  manufacturers 
were  the  various  concerns  that  supplied  the  material  from 
which  the  suit  was  made,  competing  for  the  goods  to  the 
manufacturer.  Back  still  further  were  the  growers  of 
such  raw  materials  as  cotton  and  wool,  competing  fcr  the 
furnishing  of  the  raw  materials. 

Competition  is  said  to  be  the  "life  of  trade."  It  is 
plain  from  these  examples  that  it  is  an  important  fac- 
tor. 

Competition  of  Buyers 

The  buyers  of  goods  are  also  in  competition.  We 
perhaps  did  not  notice  the  competition  in  buying  the  suit 
of  clothes,  and  yet  we  went  early  to  have  our  choice.  We 
comi)eted  with  other  buyers  for  the  particular  suit  of 
clothes.  The  merchant  competed  with  other  merchants  in 
buying  his  supply  from  the  wholesaler.  He  also  com- 
peted with  the  others  for  the  location  of  his  store  and  in 
employing  his  salesmen.  The  wholesaler  competed  with 
other  wholesalers  in  buying  from  the  manufacturer.  The 
manufacturer  competed  with  other  manufacturers  in 
buying  raw  materials  and  factory  equipment. 

When  supplies  of  raw  materials,  stocks  of  goods,  de- 


COMPETITION  AND  MONOPOLY  107 

sirable  locations,  and  coinj:)etent  salesmen  are  scarce,  the 
competition  of  buyers  becomes  as  intense  as  the  competi- 
tion of  sellers.  Such  competition  is  especially  keen  in 
buying  desirable  lots  of  goods,  renting  strategic  locations, 
or  securing  highly  competent  service. 

The  workers  of  free  competition  tend  to  keep  prices 
of  goods  at  a  fair  level  and  the  (jualities  of  goods  at  a 
fair  standard.  The  purchasers  are  constantly  comparing 
quality  and  price  of  goods  of  different  sellers,  and  the 
seller  who  gives  the  best  combination  of  quality  and 
price  will,  in  the  long  run.  get  the  orders.  Effective  com- 
petition, therefore,  protects  the  consumer  both  in  quality 
and  in  price. 

Difficulties  of  Free  Competition 

There  are  so  many  possibilities  of  the  breakdown  of 
free  competition  that  full  reliance  can  not  generally  be 
placed  in  it  to  insure  the  consumer  good  quality  at  a  fair 
price. 

In  the  first  place,  to  carry  on  our  example,  the  mer- 
chant from  whom  we  bought  the  suit  of  clothes  may 
have  been  in  agreement  w^ith  the  other  merchants  to  fix 
the  minimum  prices  of  suits  of  clothes.  In  that  event 
we  have  the  comparatively  weak  competition  of  the  mail- 
order house  and  of  the  local  tailor  to  guarantee  us  fair 
prices  and  quality. 

The  wholesalers  and  manufacturers  may  have  had  a 
similar  agreement.  The  merchants,  wholesalers,  and 
manufacturers  may  have  been  compelled  also  to  pay 
higher  rents  because  of  lack  of  competition  in  desirable 
buildings  and  locations.     The  supply  of  certain  necessary 


io8       ECONOMICS  AND  THE  COMMUNITY 

materials  may  be  controlled  by  single  persons  or  groups, 
or  transportation  service  may  be  without  competition,  and 
consequently  exorbitant  rates  may  be  charged.  The 
workers  may  withhold  their  services,  and  because  of  lack 
of  competition  may  require  a  higher  rate  of  wages.     At 


Street  car  service  is  a  monoiiuly  liere 

every  step  in  the  supply  of  materials  and  service  there 
arises  the  possibility  of  interference  with  free  competition. 

Natural  Monopoly 
Some  kinds  of  Ijusiness  are  not  suited  to  the  competitive 
method.      Railroads,  street  railways,  gas  and  electric-light 
companies,  telephone  companies,  and  water-works  can  not 


COMPETITION  AND  MONOPOLY  109 

compete  successfully,  except  in  rare  instances.  Each  per- 
forms its  best  service  when  combined  into  one  system. 
Two  street-car  companies  or  two  water  companies  in 
comi)etition  in  a  city  make  a  wasteful  condition.  Two 
railroads  between  points  where  one  railroad  would  suffice 
make  an  expensive  form  of  competition.  In  such  in- 
stances free  competition  is  a  failure.  Businesses  of  this 
character  are  called  natural  monopolies. 

Private  Monopoly 

We  come  now  to  the  discussion  of  monopoly  that  fre- 
quently drives  out  the  competitive  method  to  a  greater 
or  lesser  degree. 

Whenever  any  person,  or  group  of  persons,  has  control 
of  any  part  of  the  productive  or  distributive  processes  to 
the  extent  of  being  able  to  control  the  market,  they  con- 
stitute a  monopoly.  Likewise,  anyone  who  controls  the 
use  of  any  goods  to  the  extent  of  being  able  to  control 
the  market  constitutes  a  buyer's  monopoly. 

Methods  of  Creating  Monopoly 

A  monopoly  may  arise  in  several  ways :  ( i )  The  pro- 
ducers or  sellers  of  goods  may  enter  into  an  agreement  to 
fix  prices.  (2)  Producers  or  sellers  may  unite  to  sell 
their  goods  through  one  selling  agency,  and  divide  the 
profits.  (3)  The  producers  or  sellers  of  certain  i)roducts 
may  pool  their  entire  business  and  divide  the  profits  on  an 
agreed  plan.  (4)  One  producer  or  seller  may  get  control 
of  so  large  a  portion  of  the  product  as  to  be  able  to 
dominate  the  market.  (5)  The  producers  or  sellers  may 
form  a  trust  through  which  their  business  is  controlled 


no      ECONOMICS  AND  THE  COMMUNITY 

by  a  single  head.      (6)  One  person  or  corporation  may 

buy  competing  concerns  and  bring  them  under  one  control. 

It  is  not  necessary  for  one  concern  to  have  control  of 


Oil  pipes  leading  in  from  Ohio,  Missouri,  Pennsylvania  and  Kansas 
to  South  Bayonne,  New  Jersey 


all  competing  concerns  in  order  to  have  a  substantial 
monopoly.  If  the  portion  controlled  by  one  concern  is 
large  enough  to  make  it  the  dominating  power,  it  can,  to 
a  large  degree,  dictate  the  prices  of  its  goods. 


COMPETITION  AND  MONOPOLY  in 

But  a  nionoi)oly  needs  more  than  tlie  foreg-oing  powers 
to  maintain  itself.  Even  though  one  concern  may  have 
entire  control  of  the  output  of  a  given  product,  there  is 
nothing  to  prevent  comjjetitors  from  entering  the  business 
and  eventually  breaking  the  power  of  the  monopoly. 

Monopolies  may  maintain  themselves  against  new  or 
old  competition  in  several  ways :  ( i )  By  getting  control 
of  the  supply  of  raw  materials.  (2)  By  getting  control 
of  the  available  transportation,  such  as  pipe-lines.  (3) 
By  patents,  which  prevent  their  processes  being  used  by 
others.  (4)  By  unfair  methods,  such  as  price-cutting,  to 
crush  weak  competitors.  (5)  By  securing  special  con- 
cessions, such  as  rebates  from  railroads.  (6)  By  con- 
trolling the  banking  and  credit  facilities  and  withholding 
proper  financial  credit  to  competitors.  (7)  By  getting 
control  of  the  best  talent  and  skill  in  a  given  field,  such 
as  actors,  musicians,  or  members  of  other  professions. 

The  control  that  one  or  more  of  these  powers  gives  to 
a  business  renders  it  a  buying  as  well  as  a  selling  mo- 
nopoly. When  a  monopoly  has  been  formed,  the  producers 
of  raw  materials  have  but  one  market  in  which  to  sell. 
The  monopoly  thus  dominates  consumers  and  producers 
alike. 

Limits  of  Monopoly 

It  will  he  seen  from  the  foregoing  discussion  that  a 
monopoly  must  have  control  of  some  essential  processes, 
goods  or  services  in  order  to  be  permanent.  If  it  merely 
depends  upon  its  size  and  present  control,  it  must  reckon 
with  potential  competition  in  exercising  monopoly  power 
and  raising  prices.     While  it  may  have  the  power  to  be 


112      FXOXOMICS  AND  THE  COMMUNITY 

a  monopoly,  it  does  not  always  dare  to  exercise  the  power 
arbitrarily  for  fear  of  new  competing  enterprises.  When 
it  controls  an  essential  factor,  such  as  raw  materials, 
patents,  or  special  talent,  it  must  still  reckon  with  the 
potential  competition  of  substitutes.  It  must  further 
reckon  with  the  wrath  of  the  public  if  prices  are  raised 
without  warrant  or  if  unfair  practices  come  into  use. 

Trusts 

The  term  "trust"  is  used  in  this  country  to  designate  a 
form  of  monopoly.  The  use  of  this  term  came  about 
Ijecause  the  first  large  monopolies  were  formed  by  the 
union  of  competing  concerns  in  the  form  of  a  trust,  which 
was  a  central  holding  committee.  The  trust  did  not  own 
the  separate  companies ;  it  merely  managed  them  under 
an  agreement.  The  object  was  to  eliminate  competition 
and  create  monopoly. 

Laws  were  passed  prohibiting  this  form  of  agreement. 
The  term  "trust"  was  applied,  however,  to  the  consolida- 
tions that  thereafter  took  place.  The  trust,  as  we  know 
it  to-day,  is  really  not  a  trust  in  the  strict  sense  of  the 
term,  but  rather  a  consolidation  of  several  concerns  into 
a  single  company. 

Trusts  and  the  Law 

When  trusts  first  appeared  they  were  immediately  con- 
demned by  the  people.  Laws  were  enacted  prohibiting 
them.  Several  states  enacted  anti-trust  laws,  and  the 
United  States  Congress  in  1891  passed  the  Sherman  Anti- 
Trust  Act.  This  act  prohibited  monopolies  and  contracts 
in  restraint  of  trade,  declaring  that  "every  contract,  com- 


COMPETITION  AND  MONOPOLY  113 

bination  in  the  form  of  trust  or  otherwise,  or  conspiracy, 
in  restraint  of  trade  or  commerce  among  the  several  states, 
or  with  foreign  nations,  is  hereby  declared  to  be  illegal. 
Every  person  who  shall  make  any  such  contract,  or  engage 
in  any  such  combination  or  conspiracy,  shall  be  deemed 
guilty  of  a  misdemeanor.  Every  person  who  shall 
monopolize,  or  attempt  to  monopolize,  or  combine  to  con- 
spire with  any  other  person  or  persons  to  monopolize  any 
part  of  the  trade  or  commerce  among  the  several  states, 
or  wnth  foreign  nations,  shall  Ije  deemed  guilty  of  a 
misdemeanor."  In  any  case  the  misdemeanor  was  made 
punishable  by  fine  or  imprisonment. 

When  the  trust  was  changed  into  the  form  of  the 
consolidation  this  law^  had  less  force.  Attempts  were 
made  to  break  up  several  of  the  large  consolidations  on 
the  ground  that  they  were  agreements  to  restrain  trade. 
Little  was  accomplished,  however,  in  these  attempts, 
because  of  the  difficulty  of  obtaining  proof.  Finally,  the 
Clayton  Act  and  the  Federal  Trade  Commission  Act  were 
passed  in  19 14.  The  former  carefully  defined  the  evils 
that  were  condemned,  and  the  latter  created  a  commission 
to  consider  comi)laints  and  correct  unfair  practices. 

The  Clayton  Act  prohibited  discrimination  in  prices 
between  different  purchasers  of  the  same  goods;  pro- 
hibited agreements  whereby  sellers  require  purchasers  to 
agree  not  to  handle  the  goods  of  competitors;  and  pro- 
hibited one  corporation  from  acquiring  the  control  of 
another  with  the  purpose  of  lessening  competition.  Inter- 
locking arrangements  by  which  directors  of  one  corpora- 
tion sit  on  the  board  of  another  corporation  to  promote 
monopoly  and  lessen  competition  were  also  prohibited. 


114       ECONOMICS  AND  THl-:  COMMUNITY 

The  Federal  Trade  Commission  Act  declared  that 
"unfair  methods  of  competition  in  commerce  are  hereby 
declared  unlawful.  The  commission  is  hereby  empowered 
and  directed  to  prevent  persons,  partnerships,  or  cor- 
porations from  using  unfair  methods  of  competition  in 
commerce." 

Remedy  for  Trust  Evils 

The  experience  of  many  years  has  shown  that  free 
competition  can  not  be  strictly  maintained.  The  tendency 
is  toward  consolidation  of  or  agreements  between  com- 
peting concerns  to  eliminate  competition.  The  alternative 
that  has  been  forced  upon  the  people  is  the  regulation  of 
monopoly  itself. 

Private  monopoly  in  the  necessities  of  life  is  looked 
upon  as  intolerable  by  free  people.  Governments  are 
therefore  called  upon  in  the  interests  of  the  people  to 
regulate  prices,  qualities,  and  service.  In  so  far  as  this 
can  l>e  done  by  preventing  unfair  practices  and  by  main- 
taining competition,  it  should  be  done.  When  a  monopoly 
is  in  a  position  to  dictate  the  price  of  necessities  to  the 
people,  the  government  should  step  in  to  prevent  injustice. 

Public  regulation  has  gone  further  in  respect  to  natural 
monopolies  than  in  other  matters.  State  railroad  com- 
missions and  public  service  commissions  now  regulate 
very  minutely  the  rates  and  conditions  of  service  of  rail- 
roads, street  railways,  gas,  water  and  electric-light  com- 
panies. 

The  Interstate  Commerce  Commission  exercises  exten- 
sive powers  over  rates  and  service  on  railroads  that  cross 
state  lines.     The  Act  of  Congress  restoring  railroads  to 


COMPETITION  AND  MONOPOLY  115 

private  nKinagcment  in  1920  further  extended  the  regu- 
lation of  railroad  management,  rates,  and  service.  The 
idea  of  competition  has  l)een  abandoned  in  nearly  all  kinds 
of  public  utilities,  and  the  policy  of  regulation  substituted. 

Questions  and  Problems 

1.  Define  competition.     Give  examples. 

2.  Discuss  the  phrase,  "Competition  is  the  life  of  trade." 

3.  What  effect  does   competition   have  upon   prices   and 

quality  ? 

4.  When  several  stores  handling  the  same  products  exist 

in  a  town,  is  that  proof  that  there  is  competition? 

5.  What  is  the  importance  of  location  in  competition? 

6.  How  do  sellers  compete  otherwise  than  by  price-cut- 

ting? 

7.  Give  the   forms  of   monopoly.     What    forms   of   mo- 

nopoly are  found  in  your  community? 

8.  Upon  what  basis  does  a  monopoly  usually  fix  its  ])rice? 

9.  What  is  a  natural  monoj^)!}'?     How  are  the  prices  or 

rates  of  a  natural  monopoly  fixed? 

10.  Obtain  copies  of  the   federal   anti-trust  acts  and  the 

Trade  Commission  Act  and  study  their  provisions. 

11.  What  is  the  most  effective  way  of  preventing  mon- 

opolies ? 

12.  How  can  monopolies  be  regulated  to  the  best  advan- 

tage? 

References 

Fetter,  Modern  Economic  Problems,  Chapters  30  and  31. 
Clay,  Economics  for  the  General  Reader,  Chapters  6,  7, 
and  8. 


CHAPTER  VIII 

DISTRIBUTION    OF    INCOME 

Caniviunity  Survey 

1.  Give  examples  to  show  the  meaning  of  interest,  wages 

and  profits. 

2.  Why  is  interest  paid? 

3.  Are  there  Hmits  to  interest  charges? 

4.  What  is  the  usual  meaning  of  the  term  "rent"? 

5.  Describe  all  of  the  different  ways  in  which  wages  are 

paid.     What  are  the  principal  methods  of  payment 
of  wages  in  your  community? 

The  factors  in  production  have  already  been  named  and 
described  as  labor,  land,  capital,  and  management.  Each 
of  these  factors  contributes  something  to  the  total  product. 
The  total  income  from  production  is  divided  among  these 
four  factors. 

The  study  of  the  distribution  of  income  among  the 
four  factors  of  production  consists  in  the  analysis  of 
the  way  in  which  the  total  income  is  divided  among  them 
and  of  the  j^roblcms  growing  out  of  the  present  system 
of  distributing  the  income.  Since  each  of  the  factors 
contribute  something  to  production,  each  is  entitled  to 
a  return  for  its  contribution.  The  return  for  the  con- 
tribution of  lalxjr  is  called  wages;  the  return  for  the 
contribution  of  land  is  called  rent;  the  return  for  the  con- 
tribution of  capital  is  called  interest;  the  return  for  the 
contribution  of  management  is  called  profits. 

116 


DISTRIBUTION  OF  INCOME 


117 


Wa^es,  rent,  interest,  and  profits  do  not  necessarily  go 
to  different  individuals.  Two  or  more  of  the  separate 
returns  may  go  to  the  same  person.  The  farmer,  for 
example,  may  own  his  own  land,  supply  his  own  capital, 
manage  the  farm,  do  the  work  himself,  and  receive  the 
profits.  He  thus  receives  wages,  rent,  interest,  and 
profits.  The  manager  of  a  factory  may  supply  part  or 
all  of  the  capital  and  raw  materials,  and  perform  a  part 
of  the  labor.     The  laborer  mav  own  his  own  tools  and 


The  distribution  of  cost  of  manufactures,  1914 

may  even  own  some  shares  of  the  capital  stock  of  the 
corporation  that  runs  the  business. 

IVoges 
Wages  is  remuneration  to  labor  for  its  part  in  the 
production  of  goods.  The  term  w^ages  means  the  amount 
paid  for  the  service  of  labor  for  a  day,  week,  month,  or 
year,  or  the  amount  paid  for  doing  a  certain  piece  of 
work.  The  former  is  called  time  wages,  the  latter  is 
called  piece  wages.  The  term  "wages"  signifies  the 
amount  paid  in  lawful  money  rather  than  the  amount  of 


ii8       ECONOMICS  AND  THE  COMMUNITY 

standard  goods  that  the  wages  will  buy.  The  wage  is 
said  to  be  five  dollars  a  day,  whether  the  five  dollars  will 
buy  four  bushels  of  wheat  or  only  two  bushels.  The 
bulk  of  the  workers  of  the  country  are  paid  by  time  wages, 
usually  figured  on  an  hour  or  day  basis.  Under  this 
system  of  wages  each  worker  receives  the  same  amount 
for  a  given  length  of  time,  no  account  being  taken  of 
the  varying  capacities  of  the  workers.  The  speedy 
worker  receives  the  same  as  the  slow  worker.  Workers 
can  not  easily  be  held  responsible  for  defective  products, 
and  they  have  nothing  to  lose  immediately  by  inferior 
production. 

Piece  wages  encourage  the  workers  to  produce  the 
maximum  of  products,  but  often  result  in  excessive  speed. 
The  worker  is  held  accountable  for  defective  products, 
and  greater  care  is  usually  exercised.  Careful  inspection 
of  products  is  necessary  to  prevent  slighting  of  the  work. 
Many  combinations  of  time  and  piece  wages  have  been 
tried,  by  which  the  worker  receives  a  certain  amount  for 
a  certain  number  of  hours  and  a  bonus  for  extra  pro- 
duction. Thus,  if  a  worker  produces  more  than  the 
average  in  a  standard  day,  he  is  paid  for  the  extra  pro- 
duction. 

The  A)nount  of  the  Wage 

The  real  rpiestion  with  which  we  are  concerned  is  the 
amount  of  the  wage,  whether  piece  or  time  wage,  and 
the  way  in  which  it  is  fixed.  The  problems  involved  are 
as  old  as  civilization.  They  have  been  discussed  through- 
out the  centuries  since  labor  came  out  of  slavery  and 
serfdom  and  became  an  independent  factor  in  production. 


DISTRIBUTION  OF  INCOME  119 

The  theory  has  been  held  by  some  economists  that  the 
amount  of  wages  is  determined  by  the  cost  of  subsistence. 
Malthus  taught  that  population  increases  so  fast  in  rela- 
tion to  the  food-supply  as  to  hold  labor  to  the  level  of  a 
bare  subsistence.  This  "iron  law  of  wages"  was  very 
depressing,  since  it  implied  that  improvement  and  advance- 
ment were  impossible  for  the  great  mass  of  workers. 

The  cost-of-living  theory  of  wages  is  an  outgrowth  of 
the  old  subsistence  theory.  The  idea  is  held  by  some 
economists  that  the  cost  of  a  comfortable  living  should 
be  the  basis  upon  which  to  fix  wages.  But  the  question 
immediately  arises,  "What  constitutes  a  comfortable 
living?"  Is  it  merely  the  provision  of  food,  clothing, 
shelter,  and  a  few  enjoyments,  or  does  it  include  some 
of  the  luxuries  of  life? 

Another  theory  of  wages  is  based  upon  the  proposition 
that  the  laborer  is  entitled  to  a  return  large  enough  to  be 
sufficiently  befitting  to  his  status  as  a  human  being.  This 
status  is  held  to  be  above  the  line  of  bare  subsistence  or 
the  bare  cost  of  living.  According  to  their  theory,  labor 
is  not  a  commodity,  to  be  bought  and  sold  under  the  law 
of  supply  and  demand.  The  wage  should  be  sufficiently 
high,  according  to  the  supporters  of  this  theory,  to  provide 
for  all  of  the  needs  of  the  worker  throughout  life  and  of 
all  dependents  of  the  worker  throughout  the  period  of 
dependency.  The  wage,  it  is  claimed,  should  include  the 
necessities,  comforts,  and  some  of  the  luxuries  of  life. 

Minimum  Wage 

The  term  "minimum  wage"  means  the  lowest  wage 
upon  which  a  normal  adult  may  su[)port  himself  or  herself 


I20      ECONOMICS  AND  THE  COMMUNITY 

and  dependents  in  reasonable  comfort.  The  theory  of 
the  minimum  wage  is  that  no  normal  human  being  should 
receive  less  than  enough  to  sustain  himself  and  his  de- 
pendents. The  minimum  wage  is  not  necessarily  the 
actual  wage  or  the  average  wage.  It  is  merely  a  minimum 
standard  below  which  the  worker  can  not  sustain  himself 
in  reasonable  comfort.  Those  workers  who  are  defective 
or  subnormal,  and  who  can  not  therefore  earn  the  mini- 
mum wage  of  normal  workers,  constitute,  under  the 
minimum  wage  system,  special  problems  to  be  solved  by 
vocational  training,  rehabilitation,  readjustment,  or  char- 
itable relief. 

The  Fixing  of  Wages 

The  foregoing  theories  of  a  proper  basis  for  wages 
leave  unanswered  the  question.  How  are  wages  fixed  in 
the  world  to-day?  The  question  is  a  practical  one  that 
must  be  met  every  day,  and  it  is  variously  answered  in 
different  employments.  Sometimes  the  employers  bar- 
gain with  individual  employees.  Employees  unite  in 
trade-unions  to  bargain  collectively  with  the  employer. 
Employers  combine  in  associations  to  bargain  with  the 
representatives  of  trade-unions  on  the  question  of  the 
scale  of  wages  to  be  paid.  Governments  sometimes  fix 
wages  by  law  in  private  industry,  and  fix  minimum  wages 
for  women  and  children.  The  wages  of  public  employees 
are  determined  by  legislation. 

But,  after  the  fixing  of  wages  by  employers  or  the 
government,  or  after  bargaining  between  employers  and 
employees,  the  question  is  not  settled,  unless  sufficient 
labor  has  been  secured  at  the  wages  fixed.     The  govern- 


DISTRIBUTION  OF  INCOME  121 

ment  may  fix  the  wages  of  mail  carriers  at  fifteen  hundred 
dollars  a  year,  and  may  find  that  not  enough  qualified  men 
are  willing  to  work  for  that  amount.  In  that  case  the 
wages  must  eventually  be  raised  to  induce  enough  men 
to  engage  as  mail-carriers.  Employers  may  find  that  the 
wages  fixed  may  not  induce  sufficient  workers  to  enter 
their  employment.  The  wages  must  therefore  be  in- 
creased. The  supply  and  demand  of  labor  influences  the 
actual  wage  to  a  large  extent.  When  work  is  plentiful 
and  pressing,  and  labor  is  scarce,  wages  will  naturally 
go  up.  If  labor  is  plentiful  and  work  is  slack  and  not 
pressing,  wages  will  naturally  go  down. 

We  might  conclude  that  the  supply  and  demand  of 
labor  have  a  powerful  influence  on  wages,  and  in  the 
long  run  determine  the  amount  of  wages  to  be  paid,  if 
it  were  not  for  the  limitations  enforced  by  the  collective 
action  of  workers  or  by  law  in  fixing  wages  or  establishing 
minimum  standards  of  wages. 

Rent 

Rent  is  the  compensation  paid  for  the  service  of  land 
in  production.  The  meaning  of  the  term  "rent"  in  eco- 
nomics is  not  the  same  as  that  in  popular  use.  The  term 
as  popularly  used  refers  to  the  payment  made  to  an  owner 
for  the  use  of  land,  buildings,  rooms,  or  durable  goods. 
The  term  in  economics  refers  to  the  payment  for  the  use 
of  land  only.  The  term  "land"  itself,  as  previously 
defined,  means  not  only  land  proper,  but  the  natural 
resources  and  forces  above  and  below  the  surface  of  the 
earth. 

Distinction   should   also   be   made   between   the   terms 


122      ECONOMICS  AND  THE  COMMUNITY 

"contract  rent"  and  "economic  rent."  The  owner  of  land 
bargains  with  the  tenant  on  the  terms  of  rental,  and  the 
amount  of  rent  agreed  upon  often  depends  upon  the 
relative  ability  of  the  owner  and  tenant  in  bargaining. 
Contract  rent,  the  amount  agreed  upon,  may  be  more  or 
less  than  the  real  rental  of  the  land.     Contract  rent  tends 


No-rent  L.\nd 
A  deserted  farm 

by  the  force  of  bargaining,  however,  to  be  nearly  the  same 
as  economic  rent ;  but  it  is  not  necessarily  the  same. 

The  economic  rent  of  a  piece  of  land  is  the  measure  of 
the  productiveness  of  that  piece  of  land  over  and  above  the 
productiveness  of  the  poorest  piece  of  land  that  is  actually 
cultivated.     Illustration  will  bring  out  this  point  clearly. 

Let  us  suppose  that  there  are  four  fields  side  by  side. 


DISTRIBUTIOX  OF  TNXOME 


123 


One  of  the  fields  is  so  poor  that  it  is  not  cultivated  at  all. 
Another  is  poor,  but  is  cultivated,  although  it  produces  a 
crop  barely  sufficient  to  pay  for  its  cultivation.  The  third 
has  a  fair  soil,  and  produces,  let  us  say,  twenty  dollars 
more  in  products  than  the  second  field.  The  fourth  field 
produces  thirty  dollars  more  of  products  per  acre  than  the 


Site  Value 
One  of  the  busy  corners  in  New  York  City 

third  field.     The  first  two  fields  are  called  no-rent  land, 

because  the  first  does  not  produce  any  return  at  all  and 

the  second  does  not  produce  anything  above  the  cost  of 

production.    The  economic  rent  of  the  third  field  is  twenty 

dollars  and  of  the  fourth  field  fifty  dollars, 

A  similar  example  might  be  taken  from  fields  of  equal 

fertility  located  at  varying  distances  from  means  of  trans- 


124      ECONOMICS  AND  THE  COAIMUNITY 

port  at  ion.  A  field  twenty-five  miles  from  a  highway  may 
not  be  cultivated  at  all,  even  though  it  might  be  very 
productive.  A  second  field  may  be  ten  miles  away  from 
a  highway,  and  be  cultivated,  although  the  cost  of  bringing 
the  produce  to  market  may  be  so  great  as  to  leave  nothing 
after  the  cost  of  production  and  marketing  are  paid.  The 
third  field  may  be  located  on  the  highway  and  near  enough 
to  market  to  ena'ole  products  to  be  marketed  profitably. 
A  fourth  field  may  be  near  the  market,  and  the  return 
above  the  cost  of  production  and  distribution  may  be 
considerably  greater  than  that  of  the  third  field.  The 
first  two  fields,  under  these  circumstances,  are  no-rent 
land ;  the  third  and  fourth  fields  produce  an  economic  rent. 

Another  illustration  might  be  taken  from  a  series  of 
coal-mines  at  difi"erent  depths.  A  vein  of  coal  three 
thousand  feet  below  the  surface  may  not  be  profitable 
enough  to  be  mined.  A  second  vein  at  one  thousand  feet 
may  produce  barely  enough  to  enable  producers  to  operate 
it.  A  third  at  five  hundred  feet  may  be  operated  at  a 
fair  profit.  A  fourth  mine  may  be  practically  on  the 
surface,  and  may  l^e  worked  with  large  profit  by  the 
process  of  strip-mining.  The  first  and  second  mines  are 
no-rent  lands ;  the  third  and  fourth  produce  an  economic 
rent. 

Various  factors  enter  to  transform  no-rent  land  into 
land  that  produces  an  economic  rent.  A  wheat  field  that 
produces  five  bushels  per  acre  may  be  no-rent  land  if 
wheat  is  worth  one  dollar  a  bushel,  but  would  produce 
economic  rent,  other  things  being  equal,  if  the  price  of 
wheat  were  three  dollars  per  bushel.  A  coal-mine  might 
be  unprofitable  if  coal  brought  two  dollars  per  ton,  but 


DISTRIBUTION  OF  INCOME  125 

quite  profitable  if  coal  brought  five  dollars  per  ton. 
Increases  in  population,  which  increases  the  local  demand 
for  goods,  may  develop  no-rent  land  into  land  having  an 
economic  rent.  The  extension  or  improvement  of  roads 
and  the  betterment  of  methods  of  production  all  tend  to 
bring  no-rent  land  into  use  and  to  enhance  the  economic 
rent  of  other  lands.  The  growth  of  a  city  may  give  large 
rental  value  to  favorably  situated  real  estate  which  would 
otherwise  be  worthless. 

The  owners  of  land  roughly  measure  the  productivity 
of  their  land  and  value  it  accordingly.  The  economic 
rent  becomes  the  measure  upon  which  the  capital  value 
of  the  land  is  based.  If  land  produces  twelve  dollars  net 
per  acre  of  economic  rent,  the  owner  might  capitalize  the 
rent  at  six  per  cent  and  fix  the  value  at  two  hundred  dol- 
lars per  acre.  Having  capitalized  the  rent,  he  then 
measures  his  return  in  terms  of  interest.  Economic  rent 
thereby  becomes  interest  through  the  process  of  capital- 
ization. 

Interest 

Interest  is  the  compensation  paid  for  the  use  of  capital. 
Capital  includes,  as  we  have  already  seen,  not  only  ready 
money,  but  investments  in  equipment,  supplies,  and  raw 
materials.  The  farmer  needs  capital  in  the  form  of  tools, 
horses,  stock,  and  feed;  he  needs  capital  for  the  cost  of 
seed,  fertilizer,  and  labor;  capital  is  necessary  for  the 
planting,  cultivating,  and  harvesting  of  the  crops. 

Let  us  take  the  case  of  the  farmer  who  raises  potatoes. 
Suppose  the  seed  for  an  acre  costs  thirty  dollars,  the 
fertilizer  twenty  dollars,  spraying  ten  dollars,  and  labor 


126       ECONOIMICS  AND  THE  COMMUNITY 

for  planting,  cultivating,  and  harvesting  fifty  dollars. 
These  expenditures,  amounting  to  one  hundred  and  ten 
di^llars  per  acre,  nuist  be  advanced  by  the  farmer  for  a 
period  of  from  six  to  ten  months  before  the  crop  is 
marketed.  A  potato  farm  of  fifty  acres  would  therefore 
require  $5,500  in  capital  for  operating  expenses.  The 
farm  etjuipment  would  cost  $5,000.  Interest  on  $5,000 
for  a  year  at  six  per  cent  is  $300. 

An  allowance  should  also  be  made  for  depreciation  of 
the  equi])ment  by  wear.  This  depreciation  would  amount 
to  fully  five  per  cent  a  year,  or  $250  on  the  entire  equip- 
ment. The  farmer  must  calculate  on  an  annual  dc]:)re- 
ciation  of  $250,  an  interest  charge  on  equipment  of  $300, 
and  the  interest  on  the  $5,500  of  capital  used  to  finance 
operations  for  at  least  six  months,  or  $165.  This  makes 
a  total  interest  and  depreciation  of  $715. 

The  farmer  may  furnish  the  entire  capital  himself,  or 
he  may  furnish  the  equipment  and  borrow  part  or  all  of 
the  operating  expenses.  In  any  case,  the  interest  should 
be  calculated  as  a  charge  against  production.  Usually 
the  farmer  merely  adds  up  his  total  expenditures  and  his 
income  without  separating  it  into  the  items  of  rent,  in- 
terest, and  labor  cost,  and  the  difference  is  figured  as  a 
profit  or  loss,  as  the  case  may  be. 

Another  illustration  taken  from  a  manufacturing  enter- 
prise will  exi)lain  the  place  of  capital  and  interest.  A 
shoe  factory  has  a  capital  investment  in  buildings  and 
equipment  of  $50,000.  The  interest  charge  on  this  capital 
at  six  ])QT  cent  is  $3,000.  The  management  must  keep 
on  hand  a  supply  of  raw  materials.     The  product  of  the 


DISTRIBUTION  OF  INCOME  127 

factory  is  sent  to  distant  parts,  and  from  thirty  days  to 
six  months  usually  elapse  l)efore  payment  is  made  to  the 
manufacturer.  In  the  meantime  labor  has  been  paid  and 
money  for  fuel  has  been  expended.  The  manufacturer 
also  keeps  a  supply  of  shoes  on  hand,  in  storerooms  or  in 
warehouses,  in  order  to  have  a  reserve  to  draw  from 
when  filling  orders. 

All  of  these  investments  in  raw  materials,  fuel,  labor, 
and  stock  on  hand  or  on  its  way  to  the  purchaser  constitute 
capital.  The  total  amount  of  capital  used  continuously 
in  prcxlucing-  shoes  and  Iniancing  all  operations  until  pay- 
ment is  made  to  the  manufacturers  is,  let  us  assume, 
$50,000.  The  annual  interest  charge  at  six  per  cent 
would  be,  therefore,  $3,000.  The  total  interest  charge 
would  therefore  be  $6,000.  If  the  depreciation  on  the 
building  and  equipment  were  five  per  cent,  the  total 
depreciation  would  be  $2,500  annually.  The  total  interest 
and  depreciation  would  be  $8,500. 

These  examples  show  the  function  of  capital  and  the 
place  of  interest.  It  is  plain  that  capital  is  essential  when 
production  is  specialized  and  when  an  interval  must 
elapse  between  production  and  the  receipt  of  payment  for 
the  product.  Since  capital  performs  a  service,  it  is  en- 
titled to  compensation  for  the  service.  If  it  did  not 
receive  a  compensation  there  would  be  small  incentive 
for  the  people  to  save  and  thus  accumulate  capital. 

The  next  questions  relate  to  the  rates  of  interest  and 
the  causes  that  determine  the  fixing  of  the  rates.  Why 
do  we  pay  five,  six,  or  eight  per  cent,  as  the  case  may  be  ? 
And  why  does  the  rate  vary  from  place  to  place,  or  accord- 


128      ECONOMICS  AND  THE  COMMUNITY 

ing  to  the  type  of  loan?  Why  does  the  law  permit  pawn- 
brokers to  charge  as  high  as  forty-five  per  cent  a  year, 
and  is  such  a  charge  justified?  Why  do  government 
bonds  pay  only  four  or  five  per  cent,  while  other  bonds 
sometimes  bring  seven  and  eight  per  cent? 

The  answers  to  these  questions  may  be  found  in  the 
degree  of  risk  that  the  owner  of  capital  takes  in  lending 
money,  and  in  the  supply  and  demand  of  capital. 

The  risks  of  lending  are  of  three  kinds:  First,  the  loan 
of  capital  may  not  be  repaid;  second,  the  interest  on  the 
capital  may  not  be  paid;  third,  if  the  property  that  secures 
the  loan  is  taken  for  payment,  such  property  cannot  be 
sold.  Pawnbrokers  charge  a  high  rate  of  interest  because 
of  the  risk  of  non-payment  and  the  difficulty  in  disposing 
of  pledged  property.  People  are  willing  to  lend  money 
to  the  government  at  low  rates  because  of  the  certainty 
of  payment  of  the  loan  and  the  interest.  Risks  are  taken 
by  some  investors  for  larger  returns,  while  other  investors 
prefer  to  take  slight  risks  and  receive  smaller  returns. 

The  law  of  supply  and  demand  applies  to  capital  as 
well  as  to  commodities.  If  capital  is  plentiful  the  rate  of 
interest  will  be  lower  than  if  it  is  scarce.  In  some  of 
the  western  states  capital  commands  higher  interest  rates 
than  would  be  required  on  the  same  security  in  the  East, 
because  the  supply  of  capital  is  lower.  The  Federal 
Reserve  Act  had  for  one  of  its  objects  the  equalizing  of 
the  supply  of  capital  in  all  parts  of  the  country  by  the 
establishment  of  twelve  regional  banks  throughout  the 
country.  The  Federal  Farm  Loan  Act  also  had  for  its 
principal  object  the  equalizing  of  capital  for  loans  upon 
farm-lands  throughout  the  country. 


DISTRIBUTION  OF  INCOME  129 

Profits 

After  the  rent  of  land,  the  wages  of  labor,  and  the 
interest  of  capital  have  been  paid,  the  remainder  of  the 
income  from  production  or  distribution  of  goods  is  called 
profits.  The  organizer  of  a  business  takes  the  risk  that 
he  can  pay  rent,  wages,  and  interest  and  still  have  some- 
thing left.  If  he  is  efficient  in  organizing  land,  labor, 
and  capital,  he  will  have  profits  for  his  risk.  If  he  makes 
a  mistake  or  is  inefficient,  he  may  suffer  loss.  Profits  are 
simply  the  difference  between  the  cost  of  production  and 
what  the  management  gets  for  its  product.  The  farmer 
who  pays  $100  rent  for  ten  acres  of  land,  hires  labor  for 
$200,  and  pays  $50  interest  on  the  capital  used,  and  who 
receives  $600  for  his  product,  will  have  a  profit  of  $250. 

The  manager  of  a  business  may  be  also  the  land-owner, 
cai)italist,  and  laborer.  The  farm-owner  generally  sup- 
plies land,  labor,  and  capital  without  keeping  accounts  of 
the  amount  properly  due  to  each  factor.  Rent,  interest, 
and  wages  are  all  lumped  together,  and  if  the  gross 
expenditures  for  production  are  less  than  the  income, 
he  is  said  to  have  made  a  profit.  Many  other  small 
businesses  fail  to  separate  the  amount  properly  allowable 
for  rent,  interest,  and  wages.  Strict  accounting  w'ould 
make  the  proper  allowance  to  each  of  the  factors,  whether 
the  business  organizer  hired  labor  and  capital  or  whether 
he  supplied  labor  and  capital  himself. 

The  idea  of  profits  may  be  better  understood  by  the 
concrete  example  of  a  corporation  engaged  in  manufac- 
turing automobiles.  A  business  organizer,  believing  that 
profits  can  be  made  in  manufacturing  automobiles,  or- 
ganizes  a  corporation.     A   hundred   men   invest   in   the 


130       IXONOMICS  AND  THE  COMMUNITY 

business  by  buying  the  stock  of  the  corporation.  Land  is 
purchased  or  rented,  buildings  are  constructed,  raw 
materials  are  secured,  and  labor  is  hired.  Money  is 
borrowed  from  capitalists  or  from  banks  to  help  finance 
the  sale  and  distribution  of  the  automobiles.  At  the  close 
of  each  year  the  total  receipts  and  expenditures  are 
calculated,  and  the  profits  are  divided  among  the  stock- 
holders in  proportion  to  the  amount  of  their  stock.  The 
returns  upon  the  stock  are  profits  rather  than  interest, 
because  the  stockholders  have  taken  the  risk  that  the 
business  will  succeed.  They  are  not  guaranteed  a  certain 
rate   of   dividend. 

On  the  other  hand,  those  who  have  lent  capital  are 
guaranteed  a  certain  rate  of  interest,  and,  whether  the 
business  succeeds  or  fails,  they  may  demand  their  interest. 
They  do  not  share  in  the  profits,  nor  in  the  losses,  as  the 
stockholders  do.  Theirs  is  a  fixed  amount,  and  they 
have  a  claim  against  the  corporation's  assets  for  it. 

The  essential  feature  of  the  management  of  a  business 
is  that  of  risk-taking.  While  in  many  old  established 
lines  of  business  there  is  a  minimum  of  risk,  in  new 
ventures  there  are  many  risks.  The  management  of  a 
farm  or  of  a  retail  store  along  well  established  lines  does 
not  involve  the  risk  that  is  run  in  the  organization  of  a 
plant  to  manufacture  a  new  product,  the  demand  for 
which  is  uncertain.  Organizers  of  new  businesses  there- 
fore expect  larger  returns  to  compensate  them  for  the 
greater  risk  of  failure.  Men  would  not  risk  their  capital 
in  doubtful  enterprises  without  the  lure  of  greater  gains 
than  are  obtainable  in  lending  their  money  at  a  fair  rate 
of  interest  in  safe  enterprises. 


DISTRIBUTION  OF  INCOME  131 

Distributing  tJie  Income 

The  final  inquiry  on  this  subject  relates  to  the  causes 
that  fix  the  proportion  of  the  total  income  distributed 
to  labor,  land,  capital,  and  management.  One  of  the 
facts  frequently  overlooked  is  that  the  total  income  is  not 
determined  by  any  one  of  the  factors.  The  total  income 
depends  primarily  on  the  law  of  supply  and  demand, 
which  is  for  the  most  part  beyond  the  control  of  land- 
owners, laborers,  capitalists,  or  organizers.  Each  business 
organizer  must  face  the  question  scjuarely  in  his  own 
business.  He  can  not  fix  his  total  income  at  will  by 
raising  prices.  The  prices  of  his  products  are  fixed 
largely  by  competition,  except  in  case  of  a  monopoly,  and 
hence  his  total  income  is  fixed  by  forces  over  which  he 
has  no  control.  What  part  shall  he  pay  to  labor,  land, 
and  capital? 

If  he  could  dictate  arbitrarily,  the  problem  would  be 
easy.  But  the  possessors  of  land,  labor,  and  capital  have 
something  to  say.  The  return  that  is  demanded  by  land 
and  capital  depends  largely  upon  the  law  of  supply  and 
demand.  The  return  to  labor  also  depends  upon  the  law 
of  supply  and  demand,  plus  the  established  principle  that 
labor  is  not  a  commodity  and  must  l)e  accorded  the  human 
right  to  live  decently.  The  organizer  is  faced  with  the 
problem  of  organizing  the  factors  of  production,  whose 
compensation  he  can  not  arbitrarily  control.  He  must 
see  that  the  cost  of  producing  goods  will  be  less  than  what 
he  receives  from  the  sale  of  the  goods.  It  is  his  task  to 
keep  a  margin  between  his  costs  and  his  income.  He  can 
enlarge  the  margin  by  improving  the  organization  of  his 
factory,  making  selection  of  well  trained  employees,  and 


132       ECONOMICS  AND  THE  COMMUNITY 

improving  his  processes  of  production  and  distribution. 
Those  who  fail  to  make  improvements  will  finally  be 
driven  out  of  the  business  by  the  competition  of  those 
who  do  make  improvements. 

The  distribution  of  the  total  income  from  production 
among  the  factors,  labor,  land,  capital,  and  management, 
is  not  determined  by  any  fixed  rules,  but  depends  upon 
many  conditions.  There  is  a  conflict  among  the  factors 
for  greater  rewards. 

Numerous  plans  have  been  advocated  and  steps  taken 
to  change  the  system.  The  advocates  of  the  single  tax 
propose  the  alx)lition  of  rent,  claiming  that  society,  rather 
than  the  owner  of  land,  creates  rent.  Laws  have  been 
passed  in  some  states  and  countries,  taxing  heavily  the 
increase  of  land  values  in  cities. 

Socialists  attack  private  ownership  of  capital  and  land, 
and  demand  that  all  capital  and  land  be  owned  collectively. 
Capital  has  been  limited  in  its  return  for  several  hundred 
years,  and  at  one  time  the  taking  of  interest  was  entirely 
prohibited.  Usury  laws  are  in  force  in  all  states,  limiting 
the  rate  of  interest  that  may  be  charged  bn  loans. 

The  organization  and  management  of  businesses  are 
taken  over  by  cooperative  societies  or  by  the  public,  and 
profits  are  either  unknown  or  are  distributed  among  the 
cooperators  or  used  for  public  l:>enefits.  Profits  taxes  and 
income  taxes  are  some  of  the  means  used  to  control 
profits  for  the  public  Ijenefit. 

Labor  has  pressed  its  claim  for  greater  recognition,  and 
by  collective  action  through  trade-unions  has  forced 
minimum  standards  of  wages  in  many  employments. 
Employers  have  been  giving  more  and  more  voice  to  labor 


DISTRIBUTION  OF  INCOME  133 

in  management,  and  in  some  instances  have  divided  profits 
with  the  workers. 

In  the  future  the  hope  for  justice  in  the  distribution 
of  income  rests  upon  the  clearer  understanding  l^y  each 
factor  of  the  rights  of  the  other  factors  and  its  own 
obligations,  and  upon  the  creation  of  the  spirit  of  fair  play. 

Questions  and  Problems 

1.  Why  should  a  part  of  the  income  from  production  go 

to  each  of  the  factors  of  production? 

2.  Explain  the  distribution  of  income  received  from  run 

ning  a  farm. 

3.  Explain  the  distribution  of  income  received  from  run- 

ning a  manufacturing  plant. 

4.  Which  is  the  better  kind,  time  wages  or  piece  wages? 

What  are  the  advantages  and  disadvantages  of  each  ? 

5.  Upon  what  grounds  is  the  minimum  wage  supported? 

6.  Suppose  that  an   industry  can  not  pay  the  minimum 

wages  necessary  to  maintain  workers  and  their  de- 
pendents: does  that  justify  the  payment  of  less? 

7.  Explain  the  term  "rent"  as  used  in  economics,  and 

show  the  difference  between  contract  rent  and  eco- 
nomic rent.  Between  economic  rent  and  rent  as  the 
term  is  generally  used. 

8.  Show  how  rent  is  capitalized  by  the  owners  of  land. 

9.  Does  a  landowner  usually  think  of  his  rent  per  acre 

or  of  the  interest  on  the  value  of  the  land? 

10.  What  conditions  fix  the  rate  of  interest? 

11.  Why  is  the  rate  of  interest  upon  money  limited  by  law? 

12.  What  is  the  effect  of  the  rate  of  interest  in  the  j)ro- 

motion  of  savings  and  the  accumulation  of  capital? 

13.  Why  is  it  necessary  to  figure  the  depreciation  on  capital 

in  calculating  the  interest  returns  ? 

14.  Explain  by  examples  the  meaning  of  profits. 

15.  In  what  ways  are  profits  similar  to  interest? 

16.  Why  should  the  farmer  keep  account  of  his  wages,  rent, 

interest,  and  profits  separately? 


134       ECONOMICS  AND  THE  COMMUNITY 

17.  Suppose  that  rent,  wages,  and  interest  take  all  of  the 

income.     What  will  be  the  result? 

18.  How  can  the  returns  to  labor,  land,  capital,  and  man- 

agement be  adjusted  with  fairness  to  each  factor? 

References 
Clay,  Economics  for  the  General  Reader,  Chapters  16-20. 


CHAPTER  IX 

VALUE    AND    PRICE 

Community  Survey 

Give  examples  to  show  that  the  value  of  an  article  is  not 
always  the  same  as  the  price. 

We  are  constantly  comparing  goods  and  services  in 
money  as  the  measure  of  value.  Whenever  we  attempt 
to  place  a  value  upon  goods  or  service,  we  do  so  in  money. 
We  exchange  goods  after  having  reduced  them  to  a 
common  denominator — dollars — in  determining  for  our- 
selves their  relative  values.  We  measure  a  day's  work, 
the  cost  of  an  automobile,  or  attendance  at  the  circus  in 
money. 

Value  and  Price 

But  why  do  we  give  $io  for  a  hat,  receive  $5  for  a 
day's  work,  or  pay  $1.50  to  see  a  baseball  game?  How 
do  we  arrive  at  those  figures?  Why  was  the  seller  able 
to  demand  $10  from  us  for  the  hat,  or  $1.50  for  the  ticket 
to  the  ball  game,  and  why  are  we  able  to  secure  $5  for 
a  day's  work?  The  answer  to  these  questions  is  the 
explanation  of  value. 

We  use  the  word  "value"'  loosely  to  express  the  rate 
at  which  things  are  exchanged ;  but  things  have  value  that 
are  not  for  sale  and  are  not  exchanged.     Things  may  also 

135 


136      ECONOMICS  AXD  THE  COMMUNITY 

exchange  without  regard  to  value.  It  is  more  correct 
to  say  that  the  rate  at  which  goods  actually  sell  or  exchange 
is  the  price  rather  than  the  value.  Price  and  value  may 
correspond,  but  there  may  be  value  without  price  and 
price  without  value.  We  do  not,  as  a  rule,  pay  more  than 
our  estimate  of  value.  The  seller  of  goods  or  service 
must  generally  fix  the  price  at  the  point  that  the  buyer 
estimates  as  their  value.  The  seller  considers  what  the 
buyer's  estimate  will  be  when  he  fixes  the  price.  Most 
exchange  prices  represent  value,  but  there  are  exceptions, 
such  as  the  cheating  of  purchasers,  selling  to  intoxicated 
persons  or  to  persons  who  are  mentally  deficient. 

Many  theories  have  been  held  by  economists  regarding 
value.  Some  have  contended  that  the  value  of  an  article 
is  equal  to  the  amount  of  labor  expended  in  its  production. 
This  is  known  as  the  labor  theory  of  value.  Other  econo- 
mists have  held  that  value  is  measured  by  the  cost  of 
production.  This  is  called  the  cost-of -production  theory 
of  value.  Others  have  held  that  the  value  of  goods 
depends  upon  their  supply  and  demand. 

The  Labor  Theory  of  Value 

Those  who  have  held  the  labor  theory  of  value  include 
the  great  economists,  Adam  Smith  and  Ricardo,  and  the 
socialist  philosopher,  Karl  Marx.  Adam  Smith  stated 
the  case  plainly  when  he  said :  "It  is  natural  that  what  is 
usually  the  product  of  two  days'  labor  or  two  hours'  labor 
should  Ije  worth  double  what  is  usually  the  product  of 
one  day's  or  one  hour's  lalxDr." 

Ricardo  speaks  of  the  relative  quantity  of  labor  as 
"almost    exclusively    determining    the    relative   value   of 


VALUE  AND  PRICE  137 

commodities."  Karl  Marx  stated  that  "the  value  of  a 
commodity  is  determined  by  the  quantity  of  labor  ex- 
pended during  its  i)roduction." 

The  weakness  of  the  labor  theory  of  value  is,  however, 
apparent  when  we  ask  such  questions  as  these :  "What  is 
the  meaning  of  lalx)r?"  Does  it  include  skilled  and  un- 
skilled workers,  office  workers,  brain  workers,  managers, 
and  executives?  If  so,  what  is  the  measure  of  each  per- 
son's contribution  of  labor?  Is  the  standard  of  the  day's 
work  to  be  that  of  the  skilled  or  the  unskilled  worker, 
the  office  or  brain  worker,  or  the  manager?  What  be- 
comes of  this  theory  of  value  when  we  can  not  measure 
the  first  element,  namely,  the  value  of  the  unit  of  labor? 
Are  the  wages  of  all  men,  skilled  and  unskilled,  office 
boys  and  managers,  to  l^e  equal?  Is  capital  and  land  to 
be  assigned  no  part  in  the  process  of  production? 

This  theory  fails  to  take  account  of  the  fact  that,  after 
labor  has  been  expended  in  the  manufacture  of  a  machine, 
there  is  no  value  unless  some  one  wants  to  buy  the  machine 
at  the  value  fixed  by  the  labor  in  it.  It  also  fails  to  take 
account  of  the  fact  that  labor  is  sometimes  misdirected 
and  goods  are  often  spoiled  by  shiftless  workers.  If  the 
value  of  a  product  is  to  be  measured  by  the  labor  in  it, 
then  the  spoiled  product  should  have  value  which  it  does 
not  have.  This  theory  overlooks  the  fact  that  goods  and 
services  that  were  not  produced  by  labor  are  bought  and 
sold  for  high  prices.  Diamonds  do  not  represent  the  value 
of  the  lalx)r  in  them ;  neither  does  the  gold  that  is  i)icked 
up  in  nuggets.  The  service  of  manicuring  has  value, 
not  because  of  the  lalx)r  in  it,  but  because  some  one  desires 
that  particular  kind  of  service. 


138      ECONOMICS  AND  THE  COMMUNITY 
The  Cost-of -Production  Theory  of  Value 

The  theory  that  the  cost  of  production  determines  value 
takes  into  account  other  factors  of  production  besides 
labor.  It  assigns  a  place  to  capital,  land,  and  management. 
It  assumes  that,  when  proper  compensation  is  allowed  for 
the  contribution  of  each  of  these  factors,  the  sum  total 
equals  the  value  of  the  article  ]:)r()(luce(I.  This  theory  of 
value  has  all  of  the  difficulties  of  the  labor  theory  of  value 
plus  the  difficulties  encountered  in  trying  to  measure  the 
value  of  the  contribution  made  by  capital,  land,  and  man- 
agement toward  the  final  product. 

The  primary  objection  remains  also  that  after  an 
article  has  been  j^roduced  it  can  not  l)e  sold  at  all  unless 
someone  wants  to  buy  it,  and  it  can  not  be  sold  for  as 
much  as  the  cost  of  production  unless  someone  wants  it 
badly  enough  to  be  willing  to  pay  as  much  as  the  cost  of 
production.  Likewise  an  article  may  be  sold  for  a  price 
far  above  the  cost  of  production  if  a  purchaser  can  be 
found  who  is  willing  to  pay  the  price.  In  that  case  the 
cost  of  production  does  not  measure  the  value  of  the 
article  as  represented  by  what  the  consumer  pays  for  it. 
It  might  l)e  contended  that  an  inflated  price  does  not  rep- 
resent value.  In  answer  it  may  be  said  that  if  an  article 
that  costs  ten  cents  to  manufacture  and  upon  which  a  price 
of  one  dollar  is  fixed  is  in  demand  by  the  consumer,  it 
represents  the  consumer's  estimate  of  its  value  to  him. 
He  is  willing  to  expend  his  money  for  it  at  that  price. 
In  the  long  run,  of  course,  an  inflated  price  might  be 
forced  down  by  competition  more  nearly  to  the  cost  of 
production. 


VALUE  AND  PRICE  139 

It  is  true  that  an  article  will  not  l)e  produced  continu- 
ously for  less  than  it  actually  costs  to  produce  it.  Pro- 
ducers could  not  continue  to  sui)ply  articles  for  less  than 
the  cost  to  them;  therefore  in  the  long  run  the  cost  of 
production  is  the  minimum  price  at  which  goods  can  be 
sold.  It  is  true  also  that  competition,  when  effective, 
forces  the  price  charged  down  toward  the  cost  of  pro- 
duction. It  should  Ije  kept  in  mind,  however,  that  there 
are  many  products  whose  price  bears  no  relation  to  the 
cost  of  production,  and  that  there  are  many  products  for 
which  there  is  no  market  or  which  must  l)e  sold  for  less 
than  the  cost  of  production.  These  exceptions  are  so 
numerous  as  to  make  the  theory  that  the  cost  of  production 
determines  value  unworkable  in  explaining  everyday 
experiences. 

There  is  another  weakness  also  in  the  cost-of-production 
theory  of  value  in  that  for  a  given  article  the  cost  of  pro- 
duction may  vary  in  different  localities,  in  different  plants, 
or  on  different  farms.  One  plant,  because  of  better 
organization,  may  have  a  lower  cost  of  production  than 
another ;  another  plant  having  the  use  of  patent  devices 
may  have  a  lower  cost  of  production  than  the  first.  A 
plant  that  is  accessible  to  raw  materials  and  fuel  may  have 
an  advantage  over  a  plant  that  is  not  so  accessible.  One 
farmer  by  employing  efficient  methods  may  have  a  lower 
cost  of  production  than  another  farmer.  Which  is  to  be 
considered  the  cost  of  production  of  a  yard  of  cloth — that 
made  in  the  mill  that  is  most  efficient,  or  that  made  in  the 
mill  that  is  least  efficient  ?  Which  is  to  be  considered 
the  cost  of  a  bushel  of  wheat — that  raised  by  the  most 
efficient  farmer,  or  that  raised  by  the  least  efficient  farmer  ? 


140       ECONOMICS  AND  THE  COMMUNITY 

Or  is  it  to  be  the  cost  of  production  to  the  producer  of 
medium  efficiency  that  is  to  be  the  standard? 

These  questions  indicate  the  difficulties  of  trying  to 
measure  the  vahie  of  articles  by  the  cost  of  pro- 
duction. 

Difficulties  also  arise  in  attempting  to  measure  the  cost 
of  production  of  a  given  unit  of  the  product.  The  actual 
costs  of  each  unit  of  a  product  are  not  usually  figured. 
Cost-keeping  in  industries  has  not  succeeded  in  deter- 
mining costs  under  all  circumstances.  Such  questions  as 
these  arise :  How  is  the  cost  of  running  a  train  to  be  deter- 
mined? What  is  the  cost  of  attaching  an  additional  car  to 
a  train?  What  is  the  cost  of  manufacturing  a  yard  of 
cloth  after  the  regular  hours  of  the  working  day? 

As  a  matter  of  fact,  if  costs  of  production  determined 
value,  we  would  know  very  little  about  value,  because  we 
know  very  little  about  actual  costs  of  production.  As  an 
explanation  of  why  goods  exchange  at  certain  prices,  the 
cost  of  production  theory  breaks  down. 

The  Consumer's  Part  in  Determining  Value 

The  labor  theory  of  value  and  the  cost-of-production 
theory  of  value  try  to  explain  value  from  the  point  of  view 
of  the  producer  by  determining  the  amount  of  labor,  or  of 
lalxjr,  land,  capital,  and  management,  put  into  a  product. 
Actually  it  is  the  consumer  who  determines  the  value  of 
a  product,  and  we  shall  now  consider  the  explanation  of 
value  from  the  consumer's  standix)int.  It  has  already 
been  stated  that  goods  exchange  only  when  a  purchaser 
is  found  who  is  willing  to  take  them  at  the  price  at  which 


VALUE  AND  PRICE  141 

they  are  offered.  Goods  could  Ix.'  manufactured  without 
end.  but  they  would  not  be  sold  if  the  consumer  did  not 
want  them. 

The  consumer  measures  the  utility  of  an  article,  and 
will  pay  what  he  thinks  it  is  worth  to  him.  If  the  price 
asked  by  the  producer  is  too  high,  the  prospective  con- 
sumer will  take  less  of  the  product,  go  without,  or  choose 
some  substitute.  The  producer  can  not  charge  whatever 
he  pleases,  because  the  consumer  has  the  final  say  in  the 
matter.  If  he  will  not  buy  at  the  price  asked,  the  price 
must  be  lowered.  The  producer's  problem  is  to  estimate 
the  utility  of  the  article  to  the  consumer,  and  to  fix  the 
price  at  a  point  low  enough  to  induce  the  consumer  to 
purchase.  The  i)roducer  may  try  various  arts  of  sales- 
manship and  advertising  to  make  the  consumer  more 
desirous  of  possessing  an  article  or  product;  but.  finally, 
he  must  fix  the  price  to  suit  the  consumer's  estimate  of 
what  the  article  or  product  is  worth  to  him. 

Consumers  figure  the  utility  of  goods  closely,  because 
the  purchasing  power  of  the  great  body  of  consumers  is 
limited,  and  they  try  to  make  their  income  go  as  far  as 
possible.  Every  purchase  by  the  consumer  must  be  made 
with  due  regard  to  his  means.  Even  the  wealthy  must 
make  a  choice  of  goods  and  of  services.  The  consumer 
is  consequently  deciding  whether  he  will  purchase  a  little 
more  of  this  or  of  that  article.  He  is  constantly 
choosing  the  avenue  of  his  expenditures,  and  price  is  an 
important  factor  in  his  decisions. 

Certain  necessaries  of  life,  such  as  bread  and  potatoes, 
will  be  purchased  at  higher  prices  than  other  products; 


142       ECONOMICS  AND  THE  COMMUNITY 

but  even  with  these  products  there  is  a  limit  to  what  may 
be  charged.  The  use  of  the  article  will  be  restricted,  and 
substitutes  will  be  used  if  prices  are  excessive.  Outside 
of  the  necessaries  of  life  the  field  of  choice  is  more  exten- 
sive ;  there  is  an  easier  transfer  of  desires  from  one  thing 
to  another. 

Marginal  Utility 

The  consumer  does  not  judge  the  value  of  goods  by 
the  immediate  utility,  but  by  the  marginal  utility.  The 
immediate  utility  of  a  loaf  of  bread  to  a  man  who  has 
been  without  food  for  two  days  is  greater  than  that  to 
a  person  who  has  enjoyed  regular  meals.  The  utility  of 
a  second  loaf  is  less  than  the  first,  and  that  of  a  third  loaf 
less  than  the  second.  If  the  value  of  loaves  of  bread 
were  to  l>e  fixed  by  the  utility  of  the  first  loaf  to  the 
hungry  man,  we  would  have  an  excessive  value.  The 
second,  third,  and  successive  loaves  would  have  less  im- 
mediate utility  and  consequently  less  value  to  the  con- 
sumer. The  value  is  not  measured  by  the  first  loaf,  but 
by  the  last  loaf,  that  the  consumer  is  induced  to  purchase. 
This  last  loaf  is  the  marginal  loaf,  and  its  utility  to  the 
consumer  is  the  marginal  utility  of  loaves  of  bread.  To 
make  the  example  more  concrete,  let  us  suppose  that  fifty 
cents  was  charged  for  the  first  loaf,  twenty  for  the  second, 
and  ten  for  the  third  or  last  loaf  to  l>e  purchased.  If  the 
purchaser  is  to  be  induced  to  buy  three  loaves  of  bread, 
the  price  must  be  ten  cents  rather  than  fifty  cents.  The 
marginal  loaf  determines  the  price.  It  is  the  marginal 
utility  that  determines  the  value  of  goods  in  the  eyes 
of  the  consumer. 


VALUE  AND  PRICE  143 

Supply  and  Demand 

The  supply  of  a  product  does  not  determine  its  value. 
There  is  no  value,  whether  the  supply  be  large  or  small, 
unless  consumers  wish  to  buy  the  product  and  back  their 
wish  to  buy  by  actual  purchase.  The  demand  must  be 
present  in  determining  value.  Assuming  that  there  is  a 
demand  for  the  product,  the  value  will  then  depend  upon 
the  supply.  A  certain  amount  will  bring  a  certain  price. 
If  there  is  a  desire  to  sell  a  larger  amount  of  a  certain 
product,  the  goods  must  be  offered  at  a  lower  price.  If 
a  small  amount  is  offered  for  sale,  a  larger  price  may  be 
secured. 

The  term  "supply"  does  not  mean  the  total  supply  in 
existence,  but  the  amount  that  is  actually  offered  for  sale. 
The  term  "demand"  does  not  mean  the  total  wants  for 
the  product,  but  the  amount  that  will  be  actually  purchased 
at  a  certain  price.  Wheat  held  in  the  farmer's  bins  does 
not  constitute  supply  in  the  market ;  the  desire  for  wheat 
by  those  who  can  not  pay  for  it  does  not  constitute  demand. 
Supply  means  the  amount  that  will  be  offered  for  sale 
at  each  of  a  series  of  prices ;  demand  means  the  amount 
that  consumers  will  buy  at  each  of  a  series  of  prices. 

Some  products  are  more  sensitive  to  supply  and  demand 
than  others.  Bread  is  regular  in  the  demand  at  different 
prices.  People  must  have  bread  when  they  have  nothing 
else,  and  a  decrease  in  price  will  not  greatly  increase 
demand ;  nor  will  an  increase  in  price  cause  any  consider- 
able decrease  in  demand.  The  demand  for  bread  is  not 
elastic.  Should  the  price  be  greatly  increased,  however, 
there  would  be  a  decrease  in  demand,  because  many  people 
would  begin  to  use  substitutes.     On  the  other  hand,  the 


144      ECONOMICS  AND  THE  COMMUNITY 

demand  for  such  products  as  woolen  clothing  is  elastic. 
An  increase  in  price  will  lessen  the  demand  because  of 
the  use  of  substitutes,  and  a  decrease  in  price  will  increase 
the  demand  because  of  the  greater  desirability  of  woolen 
garments  over  garments  made  of  cotton  and  other 
materials. 

Monopoly  Price 

The  fixing  of  the  ])rice  of  goods  by  a  monopoly  that 
supplies  them  takes  into  account  the  law  of  supply  and 
demand.  We  have  already  seen  that  the  consumer  has 
a  voice  in  fixing  the  price.  The  monopolist  takes  this 
into  account.  He  fixes  his  price  generally  at  the  point 
that  will  encourage  the  largest  demand  at  the  highest  price. 
If  the  price  is  fixed  too  high  to  suit  the  consumer,  less  will 
be  purchased.  The  monopolist  balances  small  sales  and 
high  profits  per  unit  against  larger  sales  and  smaller  profits 
per  unit,  and  follows  the  policy  that  gives  the  largest  gross 
profit.  The  monopolist  must  be  a  close  observer  of  sup- 
ply and  demand  in  order  to  accomplish  his  purposes. 

If  the  monopolist  has  control  of  bread,  which  is  not 
elastic  in  demand,  he  may  increase  the  price  considerably 
without  lessening  the  demand.  When  the  product  thus 
controlled  is  a  necessity  of  life,  or  when  it  is  in  general 
use,  the  wrath  of  the  people  against  the  monopolist  will 
sooner  or  later  bring  about  public  action  for  the  control  of 
the  monopoly  and  the  regulation  of  prices. 

Price-Fixing  by  Law 
The  practice  of  price-fixing  by  law  has  been  followed 
to  an  increasing  extent  in  recent  years.     Railroad  fares 
were  formerly  fixed  by  law  at  two  cents  a  mile ;  they  are 


VALUE  AND  PRICE  145 

now  fixed  by  public  commissions.  Street-car  fares  and 
taxicab  fares  are  fixed  by  law  uv  contract ;  state  commis- 
sions control  and  regulate  prices  for  service  of  street  rail- 
ways, gas,  electric-light,  water,  and  powder  companies. 
During  the  war  the  prices  of  wheat  and  sugar  were  fixed 
in  the  United  States.  European  countries  fixed  by  law 
the  prices  of  many  products.  The  fixing  of  prices  by 
law  is  incorrectly  supposed  to  be  an  interference  with  the 
law  of  supply  and  demand.  As  a  matter  of  fact,  the 
supply  and  demand  of  a  product  becomes  adjusted  to  the 
prices  fixed.  The  price  can  not  be  permanently  fixed  in 
defiance  of  supply  and  demand.  If  the  price  is  too  low 
producers  will  cease  to  produce,  and  if  it  is  too  high 
consumers  will  lessen  their  demands  for  the  product  or 
begin  to  find  substitutes.  The  law  can  not  make  values ; 
it  can  prevent  extortion  by  preventing  excessive  prices 
charged  for  goods  by  monopolists. 

Questions  and  Problems 

1.  Does  the  amount  of  labor  in  a  product  determine  its 

value?     Give  reasons. 

2.  Can  the  actual  cost  of  labor  that  goes  into  a  product 

be  measured  ? 

3.  Why  does  the  labor  theory  of  value  fail  to  explain 

value  ? 

4.  What  is  the  value  of  the  labor  in  a  machine  that  will 

not  work  after  it  is  constructed?  What  is  the  value 
of  the  labor  in  a  suit  of  clothes  that  does  not  fit  and 
that  must  be  made  over? 

5.  Define  the  cost-of-production  theory  of  value. 

6.  Show  why  it  is  difficult  to  figure  the  costs  of  production. 

7.  Suppose  it  costs  one  hundred  dollars  to  build  a  machine 

that  no  one  will  buy  at  any  price :  is  there  one  hun- 
dred dollars  of  value  in  the  machine?  What  is  its 
value  ? 


146      ECONOMICS  AND  THE  COMMUNITY 

8.  Define  supply  and  demand. 

9.  Give  examples  of  the  way  the  prices  of  the  following 

products  are  fixed  by  supply  and  demand :  potatoes, 
automobiles,  wheat,  diamonds. 

10.  What  are  the  limits  of  the  monopolists'  power  to  fix 

prices  ? 

11.  Discuss  the  value  of  fixing  prices  by  law  or  by  public 

official  bodies. 

12.  What  is  the  utility  of  an  article? 

13.  Do  diamonds  have  utility? 

14.  Does  recreation  have  utility? 

15.  Define  marginal  utility  and  give  original  examples. 

References 
Clay,  Economics  for  the   General  Reader,  Cliapters   14 
and  IS. 


CHAPTER  X 

MONEY 

Community  Survey 

1.  What  kinds  of  money  are  used  in  your  community? 

2.  Examine    carefully   all    kinds   of   paper   and    metallic 

money. 

3.  What  examples  of  trading  without  money  are  found? 

4.  Describe  fully  the  part  that  money  plays  in  business 

activities,  and  especially  how  it  aids  in  getting  goods 
to  the  consumer. 

Money  should  be  studied  from  two  points  of  view: 
as  a  medium  of  exchange,  and  as  a  standard  of  value. 
As  a  medium  of  exchange  it  serves  to  make  possible  the 
transfer  of  goods  from  one  person  to  another.  As  a 
standard  of  value  it  becomes  the  measure  by  which  the 
value  of  goods  is  determined  in  exchange. 

Money  as  a  Mcdhini  of  Exchange 

The  method  of  buying  and  selling  goods  among  primi- 
tive people  was  usually  by  barter.  The  man  who  had 
more  skins  than  he  needed  for  himself  exchanged  the 
skins  for  some  other  product.  All  wants  for  goods  pro- 
duced by  others  were  supplied  by  such  exchanges.  Thefe 
is  some  barter  taking  place  at  all  times,  whereby  articles 
are  traded.  The  farmer,  for  example,  trades  eggs  and 
other   produce  at   the   store    for  groceries.     At  present, 

147 


148      ECONOMICS  AND  THE  COMMUNITY 

however,  nearly  all  commerce  is  carried  on  otherwise  than 
by  barter.  The  method  of  barter  had  obvious  difficulties 
even  in  primitive  times,  and  those  difficulties  under  modern 
conditions  are  insurmountable. 

Under  the  barter  system  the  person  who  had  something 
to  sell  and  wdio  wanted  certain  economic  goods  would 


■-^.Wjl? 


A  scene  of  barter 

have  to  search  to  find  a  man  who  had  those  goods  and 
who  at  the  same  time  wanted  the  article  offered  in  trade. 
Also  he  would  have  to  find  the  person  who  had  the 
right  amount  of  the  article  he  desired,  in  order  to  balance 
the  value  of  the  article  he  had  to  sell.  Because  of  these 
difficulties  fairs  were  held  where  people  brought  the 
things  they  had  to  exchange.  Exchanges  were  thus  more 
easily  arranged.     The  difficulty  still  remained,  however, 


MONEY  149 

that  a  person  who  had  something  for  sale  that  was  not 
divisible,  such  as  an  animal,  would  find  great  difficulty 
in  exchanging  it  for  equal  value.  If  a  man  had  a  cow  and 
wanted  a  sheep,  the  exchange  would  be  quite  impossible 
if  the  value  of  the  cow  and  of  the  sheep  were  materially 
different. 

The  outgrowth  of  the  barter  system  was  a  medium  of 
exchange  for  which  goods  could  be  sold  and  with  which 
other  goods  could  be  bought.  The  medium  of  exchange 
was  necessarily  something  that  was  acceptable  by  all 
people. 

The  mediums  used  for  exchange  have  been  numerous. 
In  this  country  wampum  and  furs  were  mediums  of 
exchange  with  the  Indians.  Tobacco,  grain,  and  different 
metals  of  various  designs  have  been  used.  At  the  present 
time  the  mediums  of  exchange  in  this  country  are  metallic 
and  paper  money.  Other  countries  have  also  used  many 
different  articles  as  mediums  of  exchange,  such  as  animals, 
grain,  iron,  leather,  and  tin. 

What  Makes  a  Good  Medium  of  Exchange 

The  characteristics  of  a  good  medium  of  exchange  are : 
It  must  have  real  value,  or  be  backed  by  real  value;  it 
must  be  divisible,  so  as  to  make  possible  small  exchanges ; 
it  must  be  easily  carried;  it  must  be  practically  inde- 
structible by  wear;  it  must  be  stable  in  value,  that  is,  it 
must  not  fluctuate  widely. 

It  will  be  observed  that  very  few  articles  possess  all 
of  these  characteristics.  Many  articles  possess  some  of 
them  in  a  high  degree.  Diamonds  are  highly  prized  and 
have  value  in  exchange.     They  are  also  easily  portable. 


I50      ECONOMICS  AND  THE  COMMUNITY 

But  they  are  not  divisible,  and  they  are  easily  lost  or 
destroyed.  Aluminum  would  have  many  of  the  qualities, 
but  would  lack  value. 

It  has  been  arrived  at  by  experience  that  gold  is  the 
most  approved  medium  of  exchange,  because  it  comes 
nearer  to  possessing  all  of  the  required  qualities  than  any 
other  substance.  But  gold  lacks  certain  of  the  qualities, 
and  to  make  an  ideal  medium  of  exchange  these  defi- 
ciencies must  be  made  good.  Gold  is  not  conveniently 
divisible.  y\  dollar  in  gold  at  present  w^ould  be  a  very 
small  coin,  and  a  ten-cent  piece  in  gold  w^ould  be  so  small 
as  to  be  entirely  impracticable  in  use.  Moreover,  gold  in 
large  quantities  is  not  easily  portable.  From  both  of 
these  causes  comes  the  necessity  for  substitutes.  This  is 
accomplished  by  making  token  coins  from  silver,  nickel, 
and  copper  to  provide  for  small  exchanges,  and  paper 
money  to  provide  for  large  exchanges.  Checks  and  drafts 
are  other  substitutes  for  gold  as  mediums  of  exchange. 

Standard  of  Value 

As  a  medium  of  exchange  the  substance  used  as 
money  must  have  value  or  else  it  would  not  be  readily 
accepted.  The  owner  of  wheat  would  not  give  up  his 
product  for  money  that  he  could  not  be  sure  would  be 
acceptable  to  others  from  whom  he  might  wish  to  pur- 
chase goods.  Mediums  of  exchange  are  necessarily  of 
such  substances  as  are  in  general  demand.  The  sub- 
stances used  in  past  times  had  value  as  goods  at  the 
time  they  were  used  as  money.  The  value  of  a  bushel 
of  wheat  l)Ccomes  a  matter  of  general  knowledge.  The 
owner  of  a  horse  might  therefore  fix  its  value  in  terms 


MONEY  151 

of  bushels  of  wheat.  The  owner  of  a  harness  might  also 
state  its  value  in  terms  of  bushels  of  wheat.  After  thus 
reducing  the  value  of  the  horse  and  the  harness  to  a 
common  denominator  it  is  possible  to  compare  the  value 
of  the  horse  and  the  harness.  All  articles  could  be  valued 
in  terms  of  bushels  of  wheat,  just  as  measurements  are 
compared  by  reducing  them  to  the  standard  yard.  The 
bushel  of  wheat  would  be  the  standard  or  measure  of 
value. 

But  the  value  of  wheat  is  not  the  same  from  year  to 
year;  its  value  depends  upon  its  production  annually 
throughout  the  world.  Its  value  is  not  like  a  yard-stick, 
which  is  always  the  same  length.  It  is  obvious  that  a 
standard  of  value  should  be  a  substance  or  thing  that 
does  not  fluctuate  widely  in  value.  It  will  not  be  a  good 
measure  of  value  if  its  own  value  is  not  stable  from  year 
to  year.  To  emphasize  this  point  let  us  consider  the 
possible  use  of  a  bushel  of  potatoes  as  a  standard  of 
value.  Potatoes  have  fluctuated  in  price  in  the  last  few 
vears,  at  times  being  fourfold  as  valuable  in  the  market 
as  at  other  times.  Clearly,  such  a  standard  would  be 
no  standard ;  its  value  would  change  from  month  to 
month.  Similar  tests  would  eliminate  most  substances 
as  possible  standards  of  value.  The  world  has  finally 
settled  upon  gold  as  the  substance  that  best  fits  the  re- 
quirements as  a  standard  of  value. 

Standard  of  Deferred  Payments 

The  need  for  a  stable  measure  of  value  is  brought  out 
clearly  when  we  remember  that  much  of  the  business  of 
the  world  calls   for  payment  in  the   future.     The  bor- 


152      ECONOMICS  AND  THE  COMMUNITY 

rower  promises  to  pay  in  sixty  days,  six  months,  six 
years  or  other  period.  The  lender  has  a  right  to  ex- 
pect payment  in  money  just  as  good  as  he  lent  to  the 
borrower:  the  borrower  has  the  right  to  pay  his  debt  in 
money  no  better  than  that  which  he  borrowed.  Contracts 
calling  for  payment  on  the  completion  of  a  piece  of  work 
would  be  unfair  to  one  party  or  the  other  if  the  measure 
of  value  fluctuated  between  the  time  the  contract  was 
made  and  the  time  it  was  fulfilled.  Agreements  to  work 
for  an  employer  for  a  certain  period  w^ould  work  an  in- 
justice upon  the  employer  or  the  employee  if  the  measure 
of  value  fluctuated  widely,  as  w^ould  be  the  case  if  the 
measure  of  value  were  wheat,  potatoes,  or  corn.  De- 
posits in  banks  would  be  impossible  unless  the  depositors 
were  sure  to  get  back  money  of  equal  value.  Because 
the  gold  supply  increases  only  slightly  from  year  to  year, 
gold  has  a  more  stable  value  than  other  substances  or 
products,  and  hence  it  is  more  dependable  as  a  standard 
of  future  or  deferred  payments. 

The  Single  Standard 

When  one  substance  is  used  as  a  measure  of  value 
it  is  called  the  single  standard.  For  many  years  the 
great  commercial  countries  of  the  world  have  used  gold 
as  the  single  standard.  The  United  States  has  used  gold 
virtually  as  the  single  standard  since  1873.  Since  1900 
gold  has  been  legally  the  single  standard  in  this  country. 

The  Double  Standard — Bimetallism 

The  double  standard,  or  bimetallism,  is  the  use  of  two 
metals — gold   and   silver — as   measures   of   value.     The 


MONEY  153 

United  States  used  the  double  standard  for  many  years 
prior  to  1873.  Gold  and  silver  were  coined  free  of 
charge  by  the  government  at  the  rate  of  sixteen  to  one 
(approximately  sixteen  ounces  of  silver  equaling  one 
ounce  of  gold).  The  advocates  of  the  double  standard 
claimed  that  the  value  of  gold  and  silver  would  remain 
at  about  the  same  ratio.  As  a  matter  of  fact  the  values 
fluctuated,  so  that  at  times  the  value  of  silver  was  greater 
as  bullion  than  as  coin,  and  likewise  the  value  of  gold  at 
times  was  greater  as  bullion  than  as  coin.  When  the 
value  of  either,  as  bullion,  was  greater  than  the  value 
as  coin,  the  coins  were  melted  and  no  others  were  coined. 
The  large  increase  in  the  production  of  silver,  and  the 
discontinuance  of  its  use  as  a  standard  of  value  by  the 
leading  countries,  caused  a  heavy  drop  in  the  price  of 
silver.  At  one  time  the  ratio  to  gold  was  about  thirty- 
two  to  one.  In  recent  years  the  price  oi  silver  has  in- 
creased, and  at  one  time  in  1920  it  was  quoted  slightly 
higher  than  the  ratio  of  sixteen  to  one. 

Free  Coinage 

Free  coinage  means  that  the  government  will  coin, 
free  of  charge,  bullion  brought  to  the  mint.  At  present 
the  privilege  of  free  coinage  is  enjoyed  only  for  gold 
bullion.  Any  owner  of  gold  bullion  may  take  it  to  the 
mint  and  receive  an  equal  amount  of  gold  in  coins.  For- 
merly silver  dollars  were  coined  free,  but  free  coinage  of 
silver  was  discontinued  in  1873.  Silver,  nickel  and  cop- 
l)er  coins  are  coined  by  the  government,  as  the  need  arises, 
from  metal  purchased  by  the  government. 


154      ECONOMICS  AND  THE  COMMUNITY 
Paper  Money 

Paper  money  has  been  used  in  all  countries,  and  at 
times  excessive  amounts  have  been  issued  by  govern- 
ments as  an  easy  way  to  pay  their  bills.  The  cost  of  the 
paper  is  slight,  and  engraving  shops  and  printing  presses 
turn  out  paper  money  with  great  speed.  When  the  value 
of  the  money  consists  merely  in  the  stamp  of  the  gov- 


Interior  U.  S.  mint 

ernment.  it  is  called  fiat  money :  the  government  declares 
it  to  be  money.  The  value  of  fiat  money  dej)ends  upon 
the  confidence  in  the  government.  If  the  government 
issues  a  small  amount  and  promises  to  redeem  it,  people 
readily  accept  it.  If  large  amounts  are  issued,  the  people 
lose  confidence  and  refuse  to  accept  it  at  full  value.  In 
time,  if  the  policy  of  issuing  paper  money  is  continued, 
confidence  is  entirely  lost  and  the  paper  money  becomes 


MONEY  155 

practically  worthless.  Continental  paper  money  fell  to 
almost  nothing  during  the  American  Revolution.  Rus- 
sian paper  money  is  almost  worthless  to-day,  and  the 
paper  money  of  some  other  European  countries  is  accepted 
at  a  small  fraction  of  its  face  value. 

Not  all  paper  money  is  fiat  money.  The  paper  money 
of  the  United  States  to-day  is  not  fiat  money.  It  is  backed 
by  value,  either  by  being  convertible  into  gold  or  by  be- 
mg  backed  by  the  credit  of  the  banks  that  issue  it  as  well 
as  the  deposit  of  gold,  silver,  or  securities.  All  forms 
of  money  of  the  United  States  are  accepted  in  transac- 
tions at  face  value.  If  anyone  has  doubts  about  the 
value  of  paper  money  he  can  readily  exchange  it  for 
coin.  Confidence  is  thus  established  in  all  forms  of  paper 
money. 

Kinds  of  Money  in  the  United  States 

There  are  ten  different  kinds  of  money  in  use  in  the 
United  States,  as  follows :  Gold,  gold  certificates,  silver 
dollars,  silver  certificates,  subsidiary  silver,  treasury 
notes,  United  States  notes,  federal  reserve  notes,  federal 
reserve  bank  notes,  and  national  bank  notes.  On  June 
30,  1919,  there  were  in  circulation  the  following  amounts 
of  the  different  kinds  of  money : 

Gold  coin,  including  bullion  in  treasury $1,112,353,324 

Gold  certificates 530,362,211 

Standard    silver    dollars 80,754,524 

Silver  certificates 169,148,295 

Subsidiary   silver 231,886,499 

Treasury  notes  of  1890 1,745,161 

United  States  notes 332,862,55 1 

Federal   reserve  notes 2,494,029,931 

Federal  reserve  bank  notes 163,245,730 

National    bank   notes 649,641,741 


156      ECONOMICS  AND  THE  COMMUNITY 

Gold  Coin 

The  gold  in  circulation  in  the  United  States  consists 
of  coin  and  bullion.  The  gold  coins  are  the  double- 
eagle  ($20).  the  eagle  ($10),  the  half -eagle  ($5),  the 
quarter-eagle  ($2.50).  Formerly  $1  gold  pieces,  and 
$3  gold  pieces  were  coined,  but  their  coinage  was  dis- 
continued in  1890.  A  large  part  of  the  gold  is  held  in 
the  form  of  bullion  in  the  treasury.     When  weighed  and 


Money  in  circulation   June   30,    1919.     Treasury   notes   of    1890 
omitted   from   graph  =  $1,745,161 

stamped  it  serves  the  same  purpose  as  coin,  because  its 
value  as  bullion  is  exactly  the  same  as  its  value  as  coin. 

Gold  Certificates 
Because  of  the  difficulty  of  using  large  amounts  of 
gold  in  everyday  transactions,  gold  certificates  have  been 
issued,  representing  the  actual  gold  held  in  the  treasury. 
Gold  certificates  have  been  called  warehouse  receipts  for 
the  gold  stored  in  the  treasury.  Anyone  holding  a  gold 
certificate  may  present  it  to  the  treasury  and  receive  the 
amount  of  the  certificate  in  gold  coin. 


MONEY  157 

It  will  be  readily  seen  that  gold  certificates  are  much 
more  serviceable  than  the  coin  itself  would  l>e.  They 
save  the  wear  of  the  gold  coin  and  are  easier  to  handle. 
Since  they  may  be  exchanged  for  full  value  in  gold, 
everyone  accepts  them  as  if  they  were  gold. 

Silver  Dollars 

Silver  dollars  have  been  issued  in  large  quantities, 
but  the  size  and  weight  of  the  coin  makes  their  use  lim- 
ited in  ordinary  business.  In  the  early  years  of  our 
nation  the  silver  dollar  was  the  standard  money;  but  its 
value  decreased  so  rapidly  in  comi)arison  with  gold  that 
the  free  coinage  of  silver  was  discontinued  in  1873.  The 
value  of  the  silver  in  the  silver  dollar  at  one  time  fell 
to  about  half  its  face  value.  The  rise  in  the  value  of 
silver  in  the  last  few  years  has  brought  the  value  of  the 
silver  at  times  above  the  face  value  of  the  coin. 

That  the  silver  dollar  is  readily  received  in  transac- 
tions at  its  full  value,  even  when  its  value  is  less,  is  due 
to  the  fact  that  it  is  readily  exchangeable  for  gold,  and 
therefore  everyone  accepts  it  as  if  it  were  gold. 

The  law  does  not  compel  the  treasury  to  pay  gold  in 
exchange  for  silver;  but  the  policy  of  the  country  has 
been  to  maintain  all  kinds  of  money  at  par,  so  that  in 
practice  silver  may  be  exchanged  for  gold. 

Silver  Certificates 

Silver  certificates  are  similar  to  gold  certificates  in  that 
they  circulate  in  place  of  the  silver  dollars  that  are  held 
in  the  treasury.  Silver  certificates  merely  represent  silver 
that  is  kept  in  the  treasury  because  it  is  too  bulky  to  use. 


158      ECONOMICS  AND  THE  COMMUNITY 

Silver  certificates  are  readily  accepted  in  trade,  because 
they  are  also,  in  practice,  exchangeable  for  gold.  The 
law  does  not  compel  such  exchange ;  but  the  practice  has 
always  been  to  make  one  kind  of  money  as  good  as 
another. 

Subsidiary  Silver  and  Minor  Coins 

To  meet  the  needs  in  small  business  transactions  a 
number  of  coins  made  of  silver,  nickel,  and  copper  have 
been  provided.  The  half-dollar,  quarter-dollar,  and  ten- 
cent  piece  are  made  of  silver.  At  one  time  a  three-cent 
piece,  made  of  silver,  was  in  circulation.  Other  coins  are 
the  five-cent  piece,  made  of  nickel,  and  the  one-cent  piece, 
made  of  copper.  Formerly  a  two-cent  piece  and  a  half- 
cent  piece  were  in  circulation. 

Money  of  this  kind  is  called  token  money.  None  of 
it  has  actual  value  equal  to  the  face  value,  but  because 
it  is  in  practice  redeemable  in  gold,  it  passes  in  current 
trade  for  its  full  face  value. 

Treasury  Notes 

The  treasury  notes  were  issued  in  1890  to  pay  for 
silver  bullion  that  was  required  by  law  to  be  purchased. 
These  notes  were  redeemable  in  gold  or  silver.  They 
were  later  retired  from  circulation,  and  the  small  amount 
still  in  circulation  represents  the  part  that  has  not  yet 
found  its  way  to  the  treasury  for  redemption  in  other 
forms  of  money. 

United  States  Notes 

The  United  States  notes  were  issued  for  the  first  time 
during   the   Civil   War.      Later   they  became  known   as 


MONEY  iSq 

greenbacks.  They  were  first  issued  as  emergency  money 
to  meet  the  enormous  expenses  of  the  Civil  War,  and 
large  amounts  were  issued  before  the  war  was  over. 

The  issue  of  these  notes  in  large  quantities  caused 
their  depreciation  in  value,  and  at  one  time  thev  could  be 
bought  for  about  one  third  of  their  face  value.  Later 
they  were  made  exchangeable  for  gold,  and  a  special  fund 
is  now  held  in  the  treasury  to  redeem  them  when  pre- 
sented. The  amount  of  such  notes  has  remained  about 
the  same  since  1878.  The  value  of  these  notes  depends 
entirely  upon  the  credit  of  the  government  and  the  fact 
that  they  are  redeemable  in  gold. 

National  Bank  Notes 

National  bank  notes  were  first  issued  during  the  Civil 
War  as  a  part  of  the  means  of  financing  the  operations 
of  the  government  during  war.  They  are  issued  by  na- 
tional banks  on  the  security  of  United  States  bonds  owned 
by  the  banks  and  deposited  in  the  national  treasury.  The 
bank  becomes  responsible  for  their  payment,  and  the 
holder  of  the  notes  is  secured  by  the  government  bonds 
held  in  the  treasury.  All  national  banks  are  required  to 
receive  the  national  bank  notes  of  other  banks  at  their 
face  value. 

Federal  Reserve  Notes 

Since  the  passage  of  the  Federal  Reserve  Act  in  191 3 
it  has  been  the  policy  of  the  government  to  limit  the  issue 
of  national  bank  notes,  and  provide  for  federal  reserve 
notes  in  their  place.  These  notes  are  issued  by  the  Fed- 
eral Reserve  banks,  of  which  there  are  twelve  in  the 
different  districts  into  which  the  United  States  is  divided. 


©U.  ft  u. 

A  printing  press  in  the  U,  S.  Bureau  of  J^ngraving  and  Printing 

i6o 


MONEY  i6i 

Federal  Reserve  notes  arc  issued  by  the  banks  on  the 
security  of  bonds,  or  of  coinincrcia!  ])ai)er,  held  by  the 
bank.  The  intention  of  the  provisicjn  for  Federal  Reserve 
notes  was  to  secure  sufficient  money  to  meet  the  needs  of 
business  expansion. 

The  fact  that  should  be  noted  is  that  behind  this  kind 
of  paper  money  is  the  security  of  commercial  paper  or 
bonds  and  the  credit  of  the  bank  as  well  as  the  honor  of 
the  country  to  redeem  the  obligations  that  it  incurs. 

Federal  Reserve  Bank  Notes 

Federal  Reserve  bank  notes  are  issued  by  Federal  Re- 
serve banks  to  retire  the  national  bank  notes.  The  na- 
tional banks  are  not  compelled  to  retire  the  notes  issued 
by  them,  but  they  are  allowed  to  do  so.  In  lieu  of  na- 
tional bank  notes  redeemed,  the  Federal  Reserve  banks 
issue  Federal  Reserve  bank  notes. 

Legal  Tender 

Money  that  is  by  law  made  legal  tender  must  be  ac- 
cepted for  any  purpose  in  public  or  private  transactions. 
Not  all  kinds  of  money  are  legal  tender  for  all  purposes 
in  any  amount,  (jold  is  legal  tender  for  every  purpose. 
Silver  dollars  are  legal  tender,  unless  specially  stated  oth- 
erwise. Subsidiary  silver  coins  are  legal  tender  up  to 
$io.  Minor  coins  are  legal  tender  up  to  twenty-five 
cents.  Gold  certificates  and  silver  certificates  are  not 
legal  tender,  but  the  government  accepts  them  for  cus- 
toms, taxes,  and  public  dues.  National  bank  notes  like- 
wise are  not  legal  tender,  but  are  receivable  bv  the  gov- 


i62      FXONOMICS  AND  THE  COMMUNITY 

cnmient  for  clcl)ts.  except  for  interest  on  public  debt  and 
in  redenii>tion  oi  currency. 

The  United  States  notes,  or  greenbacks,  have  been 
made  legal  tender  for  all  debts,  public  and  private,  ex- 
cept customs,  dues,  and  interest  on  the  public  debt.  In 
actual  i)ractice,  however,  since  all  forms  of  money  are 
exchangeable  for  gold,  practically  every  form  passes  as 
legal  tender,  although  a  man  might,  for  example,  refuse 
to  receive  the  payment  of  a  debt  of  $ioo  in  nickels,  quar- 
ters, or  half-dollars. 

Questions  and  Problems 

J.     What    is    barter?     Give    examples    of    barter    in   the 
present  day. 

2.  What  are  the  limits  of  barter  as  a  means  of  exchange 

of  goods? 

3.  What  is  the  meaning  of  the  phrase,  "medium  of  ex- 

change" ? 

4.  What  are  the   characteristics   of   a   good  medium  of 

exchange  ?     What  articles  or  substances  are  satis- 
factory ?     Name  some  that  are  not. 

5.  Why  should  the  medium  of  exchange  have  value? 

6.  What  is  the  meaning  of  the  statement  that  gold  is  the 

standard  of  value? 

7.  Does  paper  money  have  real  value? 

8.  What  gives  value  in  exchange  to  paper  money? 

9.  What   are   the    dangers   of   issuing   paper   money   by 

governments  ? 

10.  What  is  meant  by  free  coinage? 

11.  Define  the  term  "bimetallism." 

12.  Define  the  single  standard  or  monometallism. 

13.  Why  is  the  making  of  money  entirely  under  the  control 

of  the  government? 

14.  May  individual  states  issue  money?     What  would  be 

the  disadvantages  if  the  states  should  issue  or  coin 
money  ? 


MONEY  163 

References 

Clay,  Economics  for  the  General  Reader,  Chapter  9. 
lloldswortli,  Money  and  Bank'nuj,  Chapters   i-O. 
Fetter,  Modern  teonouiic  Problems,  Chapters  2-6=. 


CHAPTER  XI 

BANKING 

Community  Survey 

1.  Make  a  complete  list  of  banks  in  your  community  and 

secure  copies  of  regular  reports  from  each. 

2.  What  different  kinds  of  banks  are  found  in  the  com- 

munity ? 

3.  Secure  samples  of  checks,  drafts,  notes,  deposit  slips, 

etc. 

Banks  are  institutions  organized  to  receive  money  in 
the  form  of  deposits,  to  safeguard  it  and  use  it  in  the 
form  of  loans  or  credit.  They  also  perform  other  func- 
tions, such  as  transferring  money  from  one  place  to  an- 
other, making  collections  of  notes,  checks,  and  drafts 
drawn  on  other  banks,  and  safeguarding  securities  and 
other  valuables  in  safety  deposit  vaults. 

The  bank  is  a  necessary  part  of  the  machinery  for 
financing  the  production  and  distribution  of  goods. 
Without  it  the  funds  of  the  community  would  lie  idle  in 
hiding-places  and  private  safes.  The  producer  could  not 
adequately  finance  production  and  distribution,  and  pay- 
ments would  have  to  be  made  largely  in  cash  with  all  of 
the  expense  and  risk  of  loss.  Banks  mobilize  the  money 
of  the  community  for  the  use  of  business. 

Banks  may  be  classified  as  private  banks  and  public 
or  incorj^orated  banks.     Private  banks  are  managed  by 

1 6  J. 


BANKING 


165 


individuals  or  partnerships.  Public  or  incorporated  banks 
are  conducted  by  corporations  organized  under  the  bank- 
ing laws  of  the  state  or  nation.  Public  or  incorporated 
banks  may  be  classified  as  state  banks  and  national  banks, 
according  as  they  are  incorporated  under  state  or  na- 
tional laws.  Before  1862  all  banks  in  the  United  States 
were  state  l)anks.     In  that  year  national  banks  were  au- 


Interior  of  a  Xew  York  bank 


thorized,  and  since  then  they  have  l^een  largely  extended. 
On  June  30,  19 19,  there  w^ere  7785  national  banks  ;  17,225 
state  banks;  about  3500  private  banks;  1377  trust  com- 
panies; and  1 7 19  savings  banks — making  a  total  of  31,- 
606.  The  magnitude  of  the  banking  business  in  this 
country  will  be  seen  from  the  figures  of  deposits  in  the 
different  banks  for  the  year  1920: 

National  banks  $13,705,000,000 

State  banks    10,873.000.000 

Savings   banks    6,536.000.000 

Loan  and  trust  companies   6,085,000,000 

Private  banks    (estimated)    169,000,000 


i66      ECONOMICS  AND  THE  COMMUNITY 

Coumtcrcial   and  A'on-Coiiniicrciol   Banks 

Banks  may  also  l)e  classified  as  commercial  and  non- 
commercial. Commercial  banks  seek  to  serve  the  busi- 
ness man  with  short-term  loans  on  commercial  credit. 
Non-commercial  banks  seek  to  serve  the  borrower  who 
needs  money  on  mortgages,  bonds,  and  personal  credit, 
and  also  the  individual  who  needs  opportunity  for  in- 
vestment. Most  of  the  national,  state,  and  private  banks 
are  commercial  banks,  although  many  of  them  do  a  non- 
commercial business  also.  The  non-commercial  banks 
are  the  savings  banks  (described  in  chapter  13)  and 
trust  companies,  although  most  trust  companies  do  a 
commercial  banking  business  also. 

Trust  Covipamcs 

Trust  companies  were  not  formed  originally  as  bank- 
ing institutions,  but  to  act  as  guardians  of  persons  and 
administrators  of  estates  and  to  execute  trusts.  There 
are  many  kinds  of  trusts  which  the  trust  company  is  de- 
signed to  carry  out.  Herrick,  in  his  book,  ''Trust  Com- 
panies," names  the  following  kinds  of  trusts : 

"From  active  business  men  who  have  some  special  mat- 
ters that  they  do  not  care  to  handle  for  themselves ;  from 
teachers,  artists,  doctors,  clergymen,  women,  and  others 
who  feel  that  their  inexperience  or  lack  of  time  makes  it 
wise  to  shift  financial  affairs  to  other  shoulders;  from 
persons  whose  health  requires  that  they  live  in  other 
climates  and  leave  their  business  cares  Ixihind ;  from 
absentee  property-owners ;  from  the  aged,  either  too  feeble 
to  attend  to  active  business  or  willing  to  take  a  well- 
earned  rest;  from  persons  planning  to  spend  some  time  in 


BANKING  167 

travel  and  who  must  have  a  responsible  agent  to  look  after 
their  affairs  while  away ;  and  from  others  who.  either 
from  choice  or  from  necessity,  wish  to  avoid  the  care  of 
their  property  either  temporarily  or  permanently.  In 
such  cases  the  trust  company  takes  entire  charge  of  the 
property,  whether  real  or  personal,  or  l)oth,  just  as  an 
individual  acting  in  like  capacity  would  do." 

In  most  of  the  states  trust  companies  have  not  con- 
fined themselves  to  their  original  purpose,  but  do  a  Ijank- 
ing  business;  and  in  a  few  of  the  states  the  laws  permit 
banks  to  engage  in  a  trust  company  business.  Some 
trust  companies  make  their  banking  business  of  minor 
consequence  to  their  trust  company  business,  while  oth- 
ers eng-ag^e  extensivelv  in  banking. 


't>"&^ 


Cojjuncrcial  Banks — Deposits 

If  there  were  no  banks,  individuals  and  business  men 
would  be  compelled  to  keep  their  ready  cash  in  their  own 
homes  or  business  places.  Business  men  receive  and  dis- 
burse large  sums  of  money  daily.  Private  individuals  at 
times  have  considerable  sums  of  money  on  hand.  The 
purpose  of  a  bank  is  to  bring  these  funds  together  for 
the  advantage  of  the  holder  and  the  community.  The 
money  is  received  in  the  form  of  deposits.  The  bank 
credits  the  deposit  to  the  owner  and  is  obligated  to  re- 
turn the  amount  to  the  owner. 

If  the  deposit  is  made  subject  to  withdrawal  upon  de- 
mand, it  is  called  a  demand  deposit.  If  the  deposit  is 
made  for  a  certain  length  of  time,  or  if  a  notice  of  with- 
drawal is  required  before  payment  may  be  required,  it  is 
called  a  time  deposit.     The  bank  agrees  in  the  case  of 


i68      ECONOMICS  AND  THE  COMMUNITY 


DtPOSrTED   TO  THE  CREOlT  Or 


Lincoln  Trust  Company 


204     FIFTH    AVENUE 

PLEASE  IIST  ALL  CHECKS  SEPARATELY 

WHEN    PAYABLE   OUT  OF  TOWN.  GIVE  NAME  OF  CITY 

IN    LEFT  HAND  MARSIN 


deniaiul  tleposits  to  pay  back  the  anioiiiit  of  deposits  upon 
demand,  and  in  the  case  of  time  deposits  after  a  certain 
time  or  a  certain  notice. 

The  bank  must  keep  on  hand  enough  money  to  pay 
the  demand  deposits  when  called  for,  and  the  time  de- 
posits when  due.  All 
of  the  depositors  do 
not  want  their  money 
at  the  same  time.  In 
fact,  the  new  deposits 
will  generally  equal 
the  amount  of  with- 
drawals, and  in  a 
growing  bank  will,  on 
the  average,  exceed 
the  withdrawals.  The 
bank  can  figure,  there- 
fore, that  new  depos- 
its are  coming  in  to 
offset  withdrawals.  A 
business  man  who  re- 
quires five  thousand 
dollars  daily  to  run 
his  business  will  keep 
more  than  that  nuich 
on  deposit,  besides  any 
surplus  that  he  may  have  accumulated.  Each  day  his 
incoming  cash  is  dei)f)sited  in  the  bank,  and  each  day  he 
is  drawing  out  certain  amounts.  Hundreds  of  other  busi- 
ness men  are  doing  the  same,  and  the  deposits  and  with- 
drawals are  equalized.     The  result  is  that  the  reservoir 


DOLLARS 

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BANKING  169 

of  money  in  the  banks  in  normal  times  is  kept  supplied. 
The  bank,  knowing  that  its  deposits  are  \mn^  renewed 
every  day,  can  use  a  large  part  of  the  deposits  on  hand 
to  make  loans. 

Checks  and  Drafts 

Money  is  withdrawn  from  the  bank  by  a  depositor  by 
means  of  a  check.  A  check  is  an  order  by  a  depositor 
upon  the  bank  to  pay  a  certain  amount  of  money  to  the 


N9  X*^  3» rtrv  V"-"  ^^^  ft-'    -\  >S     !?>?>. 

Lincoln  Trust  Company  i-ne 


204.    FIFTH    AVENUE 


^  ,  T- *,OvA,>,^    ^:>-^C 


x>£Ujl-^ 


A  bank  check 

person  designated,  or  to  the  bearer  of  the  check.  When 
presented  at  the  bank  the  amount  is  paid  out  and  de- 
ducted from  the  deposits  of  the  one  drawing  the  check. 
The  check  must  be  indorsed  by  the  one  to  whom  it  is  made 
payable. 

When  a  depositor  desires  to  use  a  check  where  he  is 
not  known,  or  to  bind  a  contract,  he  may  ask  his  bank 
to  certify  his  check.  The  bank  certifies  a  check  by  writ- 
ing the  word  "Certified"  across  the  face  and  signing  it. 
thereby  guaranteeing  its  payment.  The  amount  of  the 
check  is  immediately  deducted  from  the  depositor's  ac- 


1 70      ECONOMICS  AND  THE  COMMUNITY 

count,  and  the  bank  becomes  responsible  for  the  payment 
of  the  check  whenever  it  is  presented.  Instead  of  certi- 
fying a  check  the  l)ank  may  give  its  own  check,  signed 
by  the  cashier.     This  is  called  a  cashier's  check. 

Bank  Drafts 

A  bank  draft  is  an  order  by  one  bank  upon  another 
bank  for  the  payment  of  money.  It  is  used  principally 
in  payments  sent  to  other  places.  Banks  keep  some  of 
their  funds  on  deposit  in  the  larger  commercial  cities, 
such  as  New  York,  Chicago,  and  St.  Louis.  Virtually 
every  bank  has  some  deposits  in  New  York. 

In  issuing  a  New'  York  draft  a  bank  merely  draws 
its  own  check  upon  its  funds  deposited  in  a  New  York 
bank.  Since  all  banks  have  dealings  in  New  York,  a  New 
York  draft  will  be  accepted  anywhere.  Similar  drafts 
drawn  by  banks  on  their  funds  in  the  banks  in  Chicago, 
St.  Louis,  or  other  cities  are  readily  used  in  the  territory 
of  which  those  cities  are  the  commercial  centers. 

Travelers'  Checks  and  Letters  of  Credit 

Travelers  have  difficulties  in  securing  cash  in  places 
where  they  are  not  known.  Such  difficulties  would  be 
serious  if  it  were  not  for  travelers'  checks  and  letters  of 
credit.  A  traveler  can  not  carry  enough  cash  to  pay 
heavy  expenses  except  at  great  risk.  The  money  that  he 
carries  from  his  own  country  may  not,  moreover,  be  ac- 
cepted in  other  countries. 

These  difficulties  are  met  by  the  travelers'  check,  is- 
sued by  express  companies,  banks,  and  associations  such 
as   the   American    Bankers'    Association.      These   checks 


BANKING 


171 


are  issued  in  even  amounts 
of  ten  dollars  up  to  one 
hundred  dollars,  and  when 
intended  for  foreign  travel 
they  indicate  the  amount 
payable  in  the  money  of 
the  leading  countries.  The 
purchaser  of  these  checks 
signs  each  one  at  the  time 
of  purchase.  When  he 
cashes  a  check  he  again 
signs  it,  and  the  two  sig- 
natures are  easily  com- 
pared. The  banks,  express 
companies,  or  associations 
issuing  these  checks  are  so 
well  known  that  hotels 
and  banks  readily  cash 
them. 

Letters  of  credit  are 
issued  by  banks  doing  an 
international  business,  for 
the  benefit  of  customers 
who  desire  to  travel  in 
foreign  countries.  A  let- 
ter of  credit  calls  for  the 
payment  by  correspondent 
banks  in  foreign  cities  of 
the  amount  named  on  the 
face  of  the  letter.  Sup- 
pose a  traveler,  desiring  to 


5  liiinliiii 


■•--oV'S. 


egDiMuiQiBiMiiuciiiiuaaRai  uainHiiaaBnii^BtubaiB 


A  traveler's  check 


1 7-'      ECONOMICS  AND  THE  COMMUNITY 

go  to  Europe,  buys  a  letter  of  credit  .for  $10,000.  He 
may  present  the  letter  to  any  of  the  banks  mentioned  in 
the  letter.  His  signature,  compared  with  his  original 
signature  on  the  letter,  proves  his  identity,  and  the  amount 
desired  is  paid  and  deducted  on  the  letter.  From  a  bank 
ill  Paris  he  may  draw  $500;  the  balance  then  appears  on 
the  letter  as  $9,500.  Each  successive  payment  in  London, 
Amsterdam,  Rome,  etc.,  is  deducted,  and  each  banker  to 
whom  it  is  presented  knows  how  much  is  still  due  on  the 
letter. 

Bank  Loans  and  Credit 

As  we  have  seen,  the  business  of  the  bank  is  to  receive 
deposits  and  to  make  loans  or  grant  credit.  Business 
men  need  to  borrow  money  from  time  to  time.  Produc- 
tion precedes  actual  sales  by  weeks  and  months  and  even 
years.  The  producer  puts  his  money  into  the  produc- 
tion of  articles  from  which  he  will  receive  no*return  for 
some  time.  Even  in  the  case  of  direct  sales,  some  time 
must  elapse  before  the  money  for  goods  is  received  by 
the  producer.  The  function  of  the  bank  is  to  help  finance 
the  producer  and  distributor  from  the  time  of  ])r()(hic- 
tion  or  sale  of  goods  until  the  money  for  the  goods  is 
paid. 

The  custom  of  extending  credit  to  purchasers  for 
thirty,  sixty,  or  ninety  days  greatly  enlarges  the  need  for 
money  to  tide  the  producer  over  from  the  time  his  money 
goes  into  the  product  to  the  time  when  he  receives  it 
back  from  the  purchaser.  The  distributor  also  has  the 
same  need  for  money  to  tide  himself  over  from  the  time 
he  purchases  an  article  to  the  time  he  receives  payment 


BANKING  173 

from  the  one  to  whom  he  sells.  Farmers  have  need  of 
more  extended  credit  to  carry  on  their  operations  during 
the  months  of  planting  and  cultivating-,  and  until  the 
money  for  their  products  is  actually  paid  to  them.  Farm- 
ers need  still  further  credit  to  enable  them  to  hold  their 
products  for  a  favorable  market. 

It  is  the  business  of  the  bank  to  meet  the  legitimate 
needs  of  all  producers  and  distributors  during  the  period 
from  production  or  distribution  to  the  time  of  payment. 
It  is  not  the  business  of  the  l)ank  to  finance  production 
itself.  That  is  the  business  of  the  investor  and  the 
capitalist. 

It  is  not  the  business  of  the  commercial  bank  to  lend 
money  for  the  purchase  of  property.  The  non-cornmer- 
cial  bank  may  do  that,  as  well  as  individual  investors. 
The  commercial  bank  should  help  finance  operation  rather 
than  ownership. 

When  a  business  man  needs  to  borrow  money  from 
the  bank  he  may  give  his  note  to  the  bank  or  he  may 
sell  to  the  bank  the  notes  given  to  him  by  others.  This 
process  is  called  discounting.  The  bank  takes  the  note 
of  the  individual  and  pays  him  the  amount  of  money, 
less  the  interest  for  the  time  that  the  note  is  to  run. 
Likewise,  the  bank  discounts  the  notes  given  to  the  lx)r- 
rower  by  others,  paying  the  face  of  the  note  less  interest 
to  the  time  when  due. 

Trade  Acceptances 

A  new  form  of  credit,  called  the  trade  acceptance,  has 
come  into  use  in  recent  years.  The  idea  of  trade  accept- 
ances is  simple,  as  will  be  illustrated  by  an  example. 


174      IXONOMICS  AND  THE  COMMUNITY 

A  customer  of  a  Chicago  bank  buys  a  bill  of  goods 
in  Now  York.  The  seller  of  the  goods  makes  shipment 
to  Chicago  and  draws  a  draft,  due  in  ninety  days,  on  the 
Chicago  man.  This  draft  is  sent  along  with  the  bill  of 
lading  to  the  bank  of  which  the  purchaser  is  a  customer. 
The  Chicago  customer  arranges  with  his  bank  to  pay 
the  draft  when  due  in  ninety  days.  The  bank  accepts 
the  draft  by  stamping  the  word  "Accepted"  on  the  face 
of  the  draft  and  adding  its  signature.  By  this  act  the 
bank  assumes  the  ()l)ligation  to  pay  the  draft  to  the  New 
York  man  at  the  end  of  ninety  days.  The  draft  may 
then  be  taken  by  the  New  York  man  to  his  own  bank 
and  discounted,  the  same  as  a  customer's  note.  The 
Chicago  man  agrees,  of  course,  with  his  bank  to  pro- 
vide the  money  to  pay  the  draft  when  due.  The  Chi- 
cago bank  thus  lends  its  credit  by  agreeing  to  pay  the 
draft  in  ninety  days. 

A  customer  may  also  draw  his  own  draft  upon  a  bank, 
due  at  a  future  date,  and  when  accepted  by  the  bank  it 
is  discounted  the  same  as  a  note. 

Trade  acceptances  are  convenient  forms  of  credit, 
serving  the  purposes  of  trade  better  than  notes,  and 
their  use  is  growing  rapidly. 

Domestic  Exchange 

One  of  the  principal  functions  of  the  bank  is  to  collect 
for  its  customers  the  checks  and  drafts  on  other  banks 
received  by  them  from  all  i)arts  of  the  country.  This 
is  called  domestic  exchange.  The  local  checks  and  drafts 
are   collected    daily   through    the   clearing-house   by   the 


BANKING  175 

settlement  of  differences.  The  checks  and  drafts  on  (hs- 
tant  places  are  collected  by  a  settlement  between  sections 
of  the  country.  Thus,  the  New  York  banks  may  receive 
from  their  customers  $1,000,000  worth  of  checks  and 
drafts  on  Chicago  banks,  and  at  the  same  time  the  Chi- 
cago banks  may  receive  $950,000  in  checks  and  drafts 
from  their  customers  on  New  York  banks.  The  settle- 
ment would  involve  the  payment  of  $50,000  to  the  credit 
of  New  York.  The  checks  and  drafts  received  by  the 
banks  of  all  cities  upon  banks  or  persons  in  other  cities 
are  canceled  as  far  as  possible,  and  the  balances  only  are 
paid. 

If  it  were  not  for  this  system  of  exchange  each  bank 
would  have  to  collect  checks  and  drafts  in  distant  cities, 
and  the  money  would  have  to  be  shipped  in  payment. 
The  more  efficient  the  system  of  exchange,  the  smaller 
will  be  the  amount  of  money  that  must  be  transported  to 
settle  balances. 

A  concrete  illustration  will  explain  the  function  of  the 
bank  in  collecting  customers'  bills  of  exchange.  A  manu- 
facturer in  Cleveland  sells  a  bill  of  goods  to  a  merchant 
in  New  York.  The  manufacturer  draws  a  draft  on  the 
New  York  merchant  for  the  amount  of  the  bill,  payable 
at  sight,  or  in  thirty,  sixty,  or  ninety  days.  The  manu- 
facturer takes  the  draft  to  his  banker  in  Cleveland,  who 
sends  it  for  collection  to  a  New  York  bank.  The  draft 
is  paid  at  the  New  York  bank.  The  money  is  not  trans- 
ported to  Cleveland,  because  drafts  ])y  others  in  New 
York  are  drawn  on  Cleveland.  The  items  are  canceled, 
and  only  the  differences  are  actually  sent  from  one  city 


176      ECONOMICS  AND  THE  COMMUNITY 

to  the  other.  The  settlement  of  accounts  between  people 
of  different  countries  is  called  international  exchange, 
and  is  explained  in  Chapter  i8. 

Bonk  Reserves 

Reserves  of  cash  are  kept  on  hand  by  banks  to  insure 
the  payment  of  deposits.  While  ordinarily  the  deposits 
of  a  bank  c(|ual  the  withdrawals,  there  may  be  times  when 
an  unusual  withdrawal  of  money  from  a  bank  might  ex- 
haust the  supply  of  cash.  If  a  bank  should  exhaust  its 
cash  and  be  unable  to  pay  the  checks  of  its  depositors, 
even  for  a  day,  it  w^ould  be  a  serious  blow  to  the  repu- 
tation of  the  bank.  The  depositors  would  probably  be- 
come alarmed,  and  large  numbers  would  try  to  draw  out 
their  funds,  thus  making  what  is  called  a  "run"  on  the 
bank. 

Banks  keep  on  hand  a  sufficient  reserve  of  cash  to  safe- 
guard themselves  against  the  possibility  of  being  called 
upon  for  unusual  amounts  of  deposits.  A  larger  reserve 
must  be  kept  on  hand  to  pay  demand  deposits  than  time 
deposits,  because  the  demand  deposits  may  be  called  for 
without  notice,  while  in  the  case  of  time  deposits  the 
bank  requires  a  notice. 

The  banking  laws  require  all  banks  to  keep  on  hand 
a  certain  reserve.  This  reserve  need  not  be  kept  entirely 
in  the  vaults  of  the  bank,  but  may  be  deposited  with 
other  banks,  and  part  of  the  reserve  may  be  deposited 
in  the  central  reserve  cities  or  in  the  Federal  Reserve 
banks.  The  law  seeks  to  safeguard  the  banks  against 
the  possibility  of  being  without  cash  to  meet  large  with- 
drawals of  funds. 


BANKING  177 

In  practice  the  bank  reserve  needs  to  be  adjusted  to 
meet  the  special  demands  of  customers.  Large  with- 
drawals are  to  be  expected,  for  instance,  especially  on 
the  first  and  the  fifteenth  of  the  month,  when  many  em- 
ployers pay  their  employees.  It  is  true  tliat  most  of  the 
money  paid  to  employees  immediately  finds  its  way  back 
into  the  bank,  either  by  de])Osits  of  individuals  or  by  pay- 
ments to  others,  who  in  turn  deposit  it  in  the  banks. 

It  will  be  seen  that  the  reserve  is  a  very  important  mat- 
ter in  banking.  It  must  be  kept  sufficiently  high  to  pre- 
vent the  danger  of  shortage  of  cash  to  pay  depositors. 
At  the  same  time  banks  can  not  afford  to  keep  larger  re- 
serves than  necessary,  because  idle  cash  in  the  bank  is  of 
no  value  to  the  bank  and  does  not  directly  aid  business. 

Money  as  tJic  Basis  of  Credit 

The  total  amount  of  money  in  circulation  in  the  United 
States  on  July  i,  1919,  was  $5,766,000,000.  The  total 
amount  of  deposits  in  all  the  banks  of  the  country  on 
that  same  date  was  $33,000,000,000.  One  might  ask 
how  it  is  possible  to  have  $33,000,000,000  of  deposits 
when  there  is  less  than  $6,000,000,000  in  actual  money 
in  the  whole  country.  The  explanation  will  serve  to  show 
how  important  credit  is  to  the  business  of  the  country. 

Let  us  suppose  that  in  a  given  community  $1,000,000 
in  cash  is  deposited  in  the  banks.  Let  us  suppose  that 
10  per  cent  of  this  is  held  by  the  banks  as  a  cash  reserve. 
That  would  mean  that  the  other  $900,000  is  lent  to  cus- 
tomers. The  business  men  who  borrow  money  from  the 
bank  do  not  take  it  away  from  the  bank  in  cash.  The 
$900,000  borrowed  by  business  men  is  immediately  de- 


ijS      ECONOMICS  AND  THE  COMMUNITY 

posited  in  the  banks,  thus  enlarging-  the  deposits  by 
$900,000.  making  a  total  of  $1,900,000  in  deposits.  The 
$900,000  additional  deposits,  after  deducting  10  per  cent 
cash  reserve,  enable  the  banks  to  make  further  loans  to 
the  extent  of  $810,000,  which  is  in  turn  deposited  in  the 
banks,  thus  increasing  the  total  deposits  to  $2,710,000. 

Each  successive  deposit  makes  possible  additional 
credit,  until  the  million  dollars  in  cash  that  we  started 
with  l)ec()mes  five  or  six  million  dollars  in  the  form  of 
deposits,  through  the  process  of  extending  credit  to  busi- 
ness customers. 

Tlic  Cleariug-Hoiise 

A  clearing-house  is  organized  in  cities  where  there 
are  several  banks,  in  order  to  facilitate  the  daily  settle- 
ments between  the  banks.  Each  bank  receives  daily  from 
its  customers  many  checks  drawn  on  other  banks.  If  it 
were  not  for  the  clearing-house,  a  bank  would  need  to 
send  a  messenger  to  the  other  banks  with  the  checks 
drawn  against  them  that  it  had  received.  The  messen- 
ger would  then  have  to  carry  back  the  cash.  The  in- 
convenience of  that  method,  and  the  risk  of  carrying 
cash  from  bank  to  bank,  are  eliminated  by  the  clearing- 
house. 

Representatives  of  each  bank  meet  at  the  clearing- 
house every  business  day  and  exchange  checks.  The 
amounts  against  each  bank  are  largely  canceled  by  the 
checks  that  it  holds  against  other  banks.  The  balances 
due  to  any  bank  are  then  |)aid.  The  clearing-house  is 
thus  a  lalxir-  and  time-saving  device  to  expedite  settle- 
ments of  checks. 


179 


i8o      ECONOMICS  AND  THE  COMMUNITY 

The  amount  of  clearings  in  a  day  is  very  large  in  many 
cities  of  the  country.  The  average  daily  clearings  in  New 
York  City  for  1919  were  $708,592,225.  The  total  clear- 
ings for  the  New  York  clearing-house  in  19 19  were 
$2 1 4,000,000,000. 

The  Federal  Reserve  Banks 

Since  191 4  the  banking  of  the  country  has  been  or- 
ganized under  the  Federal  Reserve  banking  system.    Un- 


Federal  Reserve  Rank  Districts 

der  this  system  there  are  twelve  Federal  Reserve  banks, 
located  in  the  following  cities :  New  York,  Boston,  Phila- 
deljjhia,  Richmond,  Atlanta,  Cleveland,  Chicago,  St. 
Louis,  Kansas  City,  Dallas,  Minneapolis,  and  San  Fran- 
cisco. The  country  is  divided  into  twelve  districts,  trib- 
utary to  the  Federal  Reserve  banks.     At  the  head  of  the 


BANKING 


i»i 


system  is  the  Federal  Reserve  Board  at  Washington, 
composed  of  the  Secretary  of  the  Treasury,  the  Comp- 
troller of  the  C\irrcnc\',  and  live  nicniljers  ai)i)ointed  by 
the  President.     Banks  are  not   reciiiired  to  he  members 


©  u.  &  u. 


U.  S.  I'^edcral  Reserve  Board,  iqjj 


Left  to  right:  Andrew  W.  Mellon,  Chairman;  W.  P.  G.  Harding,  Governor; 
Edmund  Piatt,  \'ice  Governor;  Charles  S.  Hamlin,  Adolph  C.  Miller,  D.  R. 
Crissinger,   Comptroller  of   Currency,   and  J.    R.    Mitchell. 


of  the  system,  but  most  banks,  national  and  state,  have 
voted  to  be  members. 

The  Federal  Reserve  banks  are  bankers'  banks.  The 
stock  is  held  by  the  banks  of  the  district,  and  these  re- 
serve banks  carry  on  business  with  banks  only.  Indi- 
viduals do  not  borrow  from  Federal  Reserve  banks ;  their 


iS2       ECONOMICS  AND  THE  COMMUNITY 

purpose  is  to  lend  money  to  banks  on  approved  commer- 
cial security  held  by  the  bank.  A  commercial  bank  hav- 
ing more  demands  upon  it  for  loans  than  it  can  meet  may 
furnish  api)roved  commercial  securities  to  the  Federal 
Reserve  bank  of  the  district  and  borrow  money  to  meet 
the  needs  of  its  customers.  This  process  is  called  re- 
discounting.  It  makes  the  funds  of  the  district  and  of 
the  country  more  readily  available  at  the  places  where 
funds  are  needed.  It  is  especially  valuable  in  providing 
the  finances  to  move  the  farmers'  crops  after  the  harvest, 
because  it  makes  more  money  available  in  remote  regions. 
The  whole  system  is  supervised  by  the  Federal  Re- 
serve Board,  which  is  constantly  engaged  in  studying  the 
financial  needs  of  business  and  of  the  government. 

Federal  Fanii  Loan  Banks 

An  extension  of  federal  banking  activities  was  pro- 
vided for  in  19 1 6,  when  the  Federal  Farm  Loan  Act  was 
passed,  creating  a  federal  farm  loan  board  and  twelve 
farm  loan  l)anks.  These  banks  are  for  the  purpose  of 
making  funds  available  in  all  parts  of  the  country  for 
loans  upon  farm-lands  to  resident  owners.  They  are 
more  fully  described  in  Chapter  16. 

Guaranty  of  Bank  Deposits 

The  number  of  bank  failures  has  l)een  reduced  greatly 
by  the  vigilance  of  bankers  and  by  the  supervision  of 
state  and  national  officials.  Yet  occasionally  a  bank  fails, 
and  when  that  happens  the  depositors  sufifer  serious 
losses.     Such  failures  cause  loss  also  to  other  banks,  be- 


BANKING  183 

cause  they  promote  fear  among  timid  depositors  and  de- 
posits are  withdrawn. 

To  meet  this  condition  it  has  been  provided  in  sev- 
eral states  that  every  bank  shall  pay  a  certain  percentage 
of  its  deposits  into  a  guaranty  or  insurance  fund,  from 
which  the  losses  to  depositors  of  any  bank  that  fails  are 
paid.  It  is  merely  the  application  of  the  insurance  prin- 
ciple to  the  possibility  of  loss  l)y  innocent  depositors.  In 
place  of  public  guaranty  of  bank  deposits  by  law,  some 
banks  voluntarily  combine  to  insure  their  depositors 
aerainst  loss. 


Supervision  of  Banking 

Banks  hold  so  important  a  place  in  the  life  of  the  com- 
munity that  they  are  subject  to  the  closest  supervision. 
Very  strict  laws  regulate  their  organization  and  conduct. 
They  are  subject  to  inspection  constantly  by  public  offi- 
cials, and  reports  of  their  condition  are  required  reg- 
ularly. 

The  national  banks  are  under  the  supervision  of  the 
Comptroller  of  the  Currency,  and  in  some  respects  under 
the  Federal  Reserve  Board  also.  Reports  are  required 
at  least  five  times  a  year,  and  as  much  oftener  as  the 
Comptroller  decides.  Special  reports  from  a  bank  may 
be  called  for  at  any  time. 

State  banks  are  under  the  supervision  of  a  state  offi- 
cial, usually  called  Bank  Commissioner  or  Superintendent 
of  Banks.  This  official  exercises  about  the  same  au- 
thority in  most  of  the  states  as  the  Comptroller  of  the 
Currency  does  over  national  banks. 


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BANKING  185 

The  banks  are  also  subject  to  the  supervision  of  cer- 
tain associations  to  which  they  belong.  Thus,  in  many 
cities  the  banks  belong  to  the  clearing-house  association, 
which  exercises  considerable  supervision  and  control  over 
those  belonging  to  it. 

Questions  and  Problems 

I.  Write  a  report  on  the  function  of  the  bank  in  financing 
production.  Give  concrete  examples  of  the  financing 
of  manufactures,  agriculture,  merchandising,  etc. 

Define  commercial  and  non-commercial  banks.  Clas- 
sify the  banks  of  your  city  or  county  on  this  basis. 

Classify  the  banks  of  your  city  or  county  as  private, 
state,  or  national. 

What  advantages  are  there  in  the  different  forms  of 
banks  ? 

5.  What  is  a  trust  company?     Give  details  of  the  actual 

functions  performed  by  trust  companies  in  your  city. 

6.  Why  is  close  supervision  of  banks  by  the  government 
and  also  by  the  banks  themselves  important? 

Describe  the  method  of  handling  checks  received  by  a 

bank  on  other  banks  in  the  city. 
How  is  money  transferred  from  one  city  to  another? 
Give  concrete  examples  of  payments  from  your  own 
city  to  other  cities. 
9.     What  are  the  arguments  for  and  against  guaranty  or 
insurance  of  bank  deposits? 

10.  Describe  the  Federal  Reserve  banking  system.     What 

are  the  advantages  of  having  several  reserve  banks 
scattered  over  the  country,  instead  of  having  one 
central  bank? 

11.  Obtain  the  published  statements  of  the  banks  of  your 

city  and  compare  them. 

12.  What  are  demand  deposits?     Time  deposits?     What 

advantages  do  time  deposits  give  to  the  banker? 

13.  If  there  is  a  clearing-house  in  your  city,  make  a  study 

of  the  way  it  does  its  work. 

14.  Secure   samples   of    travelers'    checks   and   letters   of 

credit. 


i86      ECONOMICS  AND  THE  COMMUNITY 

15.     What  is  meant  by  credit? 

lO.     Why  should  bank  loans  not  be  made  to  finance  the 
purchase  of  buildings? 

17.  Should  commercial  banks  lend  on  farm  mortgages  for 

a  term  of  years?     Give  reasons  for  your  answer. 

18.  Explain  how  there  can  be  thirty-three  billions  of  dol- 

lars of  deposits  when  there  are  only  six  billions  of 
dollars  in  money  in  the  country. 

19.  What  are  bank  reserves?     Why  is  it  necessary  to  keep 

a  reserve? 

20.  How  large  should  the  bank  reserve  be? 

21.  Who  fixes  the  amount  of  reserve? 

References 

Fetter,  Modern  Economic  Problems,  Chapters  7,  8,  9. 

Holdsworth,  Money  and  Banking. 

U.  S.  Comptroller  of  the  Currency,  Annual  Report. 

State  Banking  Department,  Annual  Report. 

Federal  Reserve  Board,  Reports  and  Bulletins. 


CHAPTER  XII 

INSURANCE 

Community  Survey 

1.  Name  the  different  kinds  of  insurance  written  by  in- 

surance agencies  in  your  city  or  community. 

2.  Obtain   samples   of   different   kinds   of   life   insurance 

policies  from  local  agents.  Study  the  exact  pro- 
visions of  each. 

3.  Obtain  samples  of  policies  of  fire,  accident,  sickness, 

liability,  burglary,  fidelity,  and  plate-glass  insurance 
from  local  insurance  agencies,  and  analyze  their 
provisions. 

4.  Give  local  examples  of  losses  met  by  insurance. 

Insurance  is  the  sharing  of  common  risks  by  a  num- 
ber of  people.  Each  pays  a  certain  sum  into  a  fund  from 
which  those  who  suffer  a  loss  are  paid.  Each  one  of  a 
hundred  farmers,  for  example,  is  liable  to  lose  his  build- 
ings by  fire.  No  one  can  tell  which  is  to  be  the  unlucky 
one.  They  combine  to  protect  the  group  by  creating  a 
fund  to  pay  the  loss  of  any  member.  Because  they  fear 
the  calamity  of  fire  they  wish  to  be  safeguarded  against  it. 

Importance  of  Insurance  to  Business 
The  function  of  insurance  in  business  is  to  relieve 
business  enterprises  of  the  risk  of  a  calamity  that  might 
cripple  or  destroy  it.  Insurance  takes  away  the  fear  that 
investments  may  be  wiped  out  by  a  single  disaster  such 
as    fire,    storm,    accident,    or    embezzlement.     Insurance 

187 


i88      ECONOMICS  AND  THE  COMMUNITY 

stabilizes  business  conditions  by  distributing  the  risk  of 
calamities. 

Insurance  and  Gamhling 

The  difference  should  be  made  clear,  at  this  point,  be- 
tween insurance  and  gambling.  If  a  man  agrees  to  stand 
another's  fire  loss  in  return  for  a  fee,  it  is  a  gamble.  But 
if  a  man  agrees  to  stand  the  fire  loss  of  a  thousand  men 
in  return  for  a  fee  from  each,  and  if  the  amount  of  the 
fee  is  carefully  calculated,  it  is  a  Imsiness  transaction 
from  which  gambling  has  been  eliminated.  The  com- 
bined payments  of  all  will  provide  enough  to  pay  the 
losses.  Insurance  as  it  is  conducted  to-day  is  not  gam- 
bling. It  is  a  scientific  measuring  of  probable  losses  and 
the  creation  of  a  fund  to  meet  them. 

Kinds  of  Insurance 

The  business  of  insurance  has  been  extended  to  many 
lines  as  rapidly  as  it  has  become  possible  to  estimate  losses 
in  a  given  field.  Insurance  against  sea  disasters,  fires, 
accidents,  sickness,  death,  old  age,  hail,  losses  to  live- 
stock, bank  failures,  plate-glass  breakage,  boiler  explo- 
sions, tornadoes,  and  even  unemployment  and  burglary, 
has  been  developed.  Wherever  losses  can  be  measured 
in  advance,  or  estimated  somewhere  near  the  actual  figures, 
it  is  possible  to  apply  the  insurance  method. 

Marine  Insurance 

Insurance  began  several  centuries  ago  in  the  form  of 
protection  against  losses  at  sea.  Shipowners  and  mer- 
chants often  risked  everything  on  a  single  voyage.     It 


INSURANCE  189 

was  a  gamble  on  their  part  whether  their  ship  or  cargo 
would  reach  port  and  make  large  profits,  or  go  down  in 
the  ocean  and  leave  them  bankrupt. 

Gradually  there  arose  insurance  brokers  who  took  the 
risk  from  the  shipowners  or  merchants  for  the  payment 
of  a  certain  percentage  of  the  value.  If  the  ship  sank 
they  paid  the  stated  value  to  the  owner.  If  there  was 
no  loss  the  amount  paid  to  the  insurance  broker  became 
a  i)rofit.  When  the  broker  carried  the  risk  on  many  ships 
or  cargoes  he  could  figure  with  a  degree  of  certainty  the 
amount  of  probable  loss.  There  would  be  little  likelihood 
that  all  would  go  down.  Still,  of  course  there  was  always 
a  chance  that  storms  would  be  widespread  and  the  losses 
severe.  The  business  flourished,  however,  and  to-day 
there  are  few,  if  any,  ships  and  cargoes  that  go  out  with- 
out insurance.  The  risks  of  each  owner  are  borne  by 
all  through  marine  insurance. 

Life  Insurance 

The  statistics  of  death  show  how  many  people  die  each 
year,  and  from  these  it  can  be  estimated  in  advance  how 
many  people  in  every  thousand  will  die  each  year.  From 
the  statistics  of  death  by  ages  it  is  possible  to  tell  how 
long  a  man  is  expected  to  live  at  each  age.  Thus,  a  man 
at  twenty  may  expect,  according  to  the  figures  for  the 
United  States  census,  to  live  42.48  years;  at  thirty-five 
he  may  expect  to  live  30.94  years;  at  forty-five  2T,.yy 
years,  and  at  fifty-five  16.98  years. 

The  life  insurance  companies,  after  years  of  experience, 
can  tell  from  their  figures  of  deaths  at  each  age  how  long 
men  may  be  expected  to  live.     The  life  tables  are  the 


I90       FXOXOMICS  AND  THE  COMMUNITY 


Life  Table  for  Both  Sexes  in  the  Original  Registration  States 

1910 


Rate  of 

Complete 

Age 

Of  100,000  Pi 

:ksons  Born 

Mortality 

Interval 

Alive:                   I 

PER 

Expectation 
OF  Life. 

Thousand. 

Number  dying 

Average 
length  of  life 

Period  of 

Xumher  alive 

at    beginning    of^ 

age  interval. 

in    age    interval 

lifetime 

Number  dying 

among  1,000 

remaining  to 

betw.  two 
exact  ages. 

in  age  interval. 

alive  at  begin- 
ning of  age 
interval. 

each  one  alive 

at  beginning 

of  age  interval. 

Years. 

Annual  rate. 

In  years. 

O-I 

100  000 

II    462 

114.62 

5149 

1-2 

88538 

2  446 

27.62 

57-" 

2-3 

86  092 

I    062 

12.34 

5772 

3-4 

85  030 

666 

7.83 

57-44 

4-S 

84364 

477 

565 

56.89 

5-6 

83  887 

390 

4.66 

56.21 

6-7 

83  497 

i27 

391 

55-47 
54-69 

7-8 

83  170 

274 

330 

8-9 

82  896 

234 

2.82 

53.87 

9-10 

82  662 

204 

2.47 

53-02 

lO-II 

82  458 

187 

2.27 

52.15 

11-12 

82  271 

180 

2.19 

51-26 

12-13 

82  091 

182 

2.22 

50.37 

13-14 

81  909 

193 

2.36 

49-49 

14-15 

81  716 

210 

2.57 

48.60 

15-16 

81  506 

232 

2.84 

^"^ll 

16-17 

81  274 

256 

3.16 

46.86 

17-18 

81  018 

285 

3-52 

46.01 

18-19 

80  733 

315 

3.89 

45-17 

19-20 

80  418 

344 

4.28 

44-34 

20-21 

80  074 

375 

4.68 

43.53 

21-22 

79  699 

398 

500 

42.73 

22-22> 

79  301 

412 

519 

41-94 

23-24 

78  889 

418 

529 

41.16 

24-25 

78  471 

425 

542 

40.38 

25-26 

78  046 

432 

5-54 

3960 

■2fi  27 

77  614 

440 

5.67 

38-81 

27-28 

77   J  74 

45' 

5.85 

3803 

28-29 

76  72?, 

465 

6.06 

37.25 

29-30 

7f^  258 

479 

6.28 

36.48 

INSURANCE 


191 


Life  Table  for  Both  Sexes  in  the  Original  Registration  States; 
T910 — Continued 


Rate  of 

Complete 

Age 

Of  100,000  Persons  Born 

Mortality 

Interval 

Alive  : 

PER 

Expectation 
of  Life. 

Thousand. 

Number  dying 

Average 

Period  of 

\umber  alive 

at    beginning    of 

age  interval. 

in    age    interval 

length  of  life 

lifetime 
betw.  two 
exact  ages. 

Number  dying 
in  age  interval. 

among  1,000 
alive  at  begin- 
ning of  age 

remaining  to 
each  one  alive 
at  beginning 

interval. 

of  age  interval. 

Years. 

.\nnual  rate. 

In  years. 

30-31 

75  779 

493 

6.51 

3570 

31-32 

75  286 

511 

6.78 

34-93 

32-33 

74  775 

530 

7.09 

3417 

33-34 

74  245 

550 

7.40 

3341 

34-35 

73  695 

568 

7.72 

32.66 

35-36 

73  ^27 

588 

8.04 

31.90 

36-37 

72  539 

605 

8.33 

31.16 

37-38 

71  934 

617 

8.59 

30.42 

38-39 

71  317 

631 

8.84 

29.68 

39-40 

70  686 

644 

9.11 

28.94 

40-41 

70  042 

658 

9-39 

28.20 

41-42 

69384 

674 

9.72 

27.46 

42-43 

68  710 

693 

10.09 

26.73 

43-44 

68  017 

716 

10.52 

25-99 

44-45 

67  301 

740 

10.99 

25.26 

guides  that  tell  the  insurance  manager  how  much  he  must 
charge  in  premiums.  The  table  used  in  this  country  for 
many  years  was  called  the  English  Life  Table.  It  was  the 
experience  of  English  insurance  companies,  and  showed 
the  expectancy  of  life  in  England.  After  several  years 
the  American  companies  combined  the  figures  of  Ameri- 
can experience  and  made  the  American  Experience  Table. 
This  is  no-w  the  most  widely  used,  but  there  are  other 
tables  that  are  equally  good.  Recently  the  United  States 
Census    Bureau   compiled   a   table    for   the   deaths    in    a 


192      ECONOMICS  AND  THE  COMMUNITY 

number  of  states,  whicli  gives  the  most  complete  esti- 
mate in  existence  of  the  length  of  life  of  all  people  in 
America. 

When  an  insurance  company  has  accurate  figures  that 
show  by  past  experience  what  may  be  expected  in  the 
future,  it  is  a  simple  matter  to  fix  rates  that  will  provide 
a  certain  sum  at  death.  In  any  group  of  people  a  few 
will  die  early;  but  many  will  live  for  years.  Those  who 
die  early  pay  less  than  the  others.  Those  who  live  long- 
est may  pay  more  for  their  insurance  than  will  be  re- 
ceived by  their  heirs  at  death.  During  all  of  the  time. 
however,  each  person  is  assured  that  if  he  happens  to  be 
one  of  the  early  victims  his  dependents  will  receive  the 
amount  of  the  insurance.  This  assurance  that  depend- 
ents Vvill  be  protected  is  worth  a  great  deal  to  the  in- 
dividual. 

Kinds  of  Policies  of  Life  Insurance 

There  are  many  types  of  policies  of  life  insurance,  re- 
quiring different  terms  of  payment.  The  level  premium 
fixes  the  rate  for  the  whole  life,  and  the  rate  always  re- 
mains the  same.  The  step-rate  premium  makes  a  certain 
rate  for  a  certain  number  of  years,  after  which  for  an- 
other period  it  is  higher.  The  twenty-payment  policy  is 
one  that  fixes  the  rate  to  cover  the  entire  insurance  in 
twenty  payments,  after  which  no  further  premiums  are 
required.  Assessment  companies  fix  the  premiums  to  be 
paid  after  the  losses  are  known.  Many  policies  provide 
that  after  a  certain  number  of  years  a  fixed  sum  shall  be 
payable  to  the  policy-holder,  if  the  policy-holder  desires. 


INSURANCE  193 

Some  policies  provide  for  the  payment  of  a  fixed  sum 
monthly  for  a  certain  number  of  years  to  the  beneficiaries 
after  the  death  of  the  insured.  Others  provide  for  month- 
ly payments  after  a  certain  age  as  long  as  the  insured 
person  lives.  There  are  numerous  variations  of  the 
terms  and  conditions  of  policies. 

The  ]Var  Risk  Life  Insurance 

When  this  country  entered  the  European  war,  a  plan 
for  insurance  of  soldiers  and  sailors  was  formed  by  the 
government  through  the  War  Risk  Bureau.  The  men 
paid  the  actual  cost  of  ordinary  insurance,  and  the  gov- 
ernment paid  the  extra  cost  due  to  the  extra  hazard  of 
war.  When  the  war  closed  the  plan  was  continued,  so 
that  the  men  could  carry  their  insurance  at  cost. 

Fire  Insurance 

Fire  insurance  was  conducted  before  life  insurance  be- 
gan. The  risk  of  fire  being  always  present,  men  sought 
to  buy  protection  by  the  payment  of  a  definite  sum  each 
year.  The  chance  that  a  certain  house  may  burn  is  slight ; 
most  buildings  never  burn.  The  cost  of  protection  is 
therefore  not  heavy.  But  if  a  house  does  burn,  it  is  a 
calamity  to  the  owner.  Men  prefer  to  pay  the  sum  neces- 
sary to  make  sure  that  if  fate  picks  them  to  suffer  the 
disaster  of  fire  they  may  be  sufficiently  protected  to  en- 
able them  to  rebuild. 

Fire  losses  can  not  be  measured  as  exactly  as  the  loss 
of  life,  but  an  average  loss  may  be  determined  l)y  the 
figures    for   previous  years.     Except    for   some   unusual 


194       ECONOMICS  AND  THE  COMMUNITY 

conflagration,  the  average  losses  are  a  guide  to  insurance 
companies.  The  average  loss  of  farm  buildings  is  an  ac- 
curate index  of  future  losses.  The  isolation  of  farm 
buildings  eliminates  the  danger  of  conflagration  and  ex- 
cessive losses. 

City  and  village  risks  are  more  difficult  to  measure. 
Fires  such  as  those  that  occurred  in  Chicago,  Baltimore, 
and  San  Francisco  sweep  whole  villages  and  cities.  A 
single  company  that  attempted  to  carry  the  whole  insur- 
ance of  a  city  or  large  village  would  run  the  risk  of  bank- 
ruptcy from  a  single  conflagration.  For  safety  it  is  nec- 
essary to  distribute  the  risks  over  wide  areas  and  among 
many  comi)anics.  Thus  an  insurance  company  would 
not  take  all  of  the  insurance  in  a  large  village  or  city,  or 
upon  large  single  risks,  unless  it  reinsured  itself  in  other 
companies  against  the  extra  risk.  By  reinsurance  the 
risks  are  more  evenly  distributed  among  a  number  of 
companies,  and  the  danger  of  disastrous  losses  to  each 
is  lessened.  1  f  all  fire  insurance  were  in  a  single  com- 
pany, the  danger  of  disaster  in  any  one  city  would  not 
be  serious,  because  the  total  losses  for  the  country  would 
be  averaged.  There  are  hundreds  of  fire  insurance  com- 
panies; hence  the  possibility  of  reinsurance  among  them 
to  avoid  the  risk  of  particular  disasters. 

The  fact  that  some  types  of  property  are  less  exposed 
to  fires  or  have  more  uniform  risk  of  fires  than  others 
has  resulted  in  the  organization  of  mutual  companies  for 
special  kinds  of  risks.  Farmer  mutuals  are  the  most 
common.  Millers,  drug-store  owners,  and  various  classes 
of  manufacturers  have  formed  mutual  companies  for 
their  own  class  of  property. 


INSURANCE  195 

Health  and  Accident 

The  constant  risk  of  sickness  and  accident  and  the  se- 
rious nature  of  the  disaster,  when  a  long  disabHng  sick- 
ness or  accident  occurs,  has  caused  the  development  of 
insurance  in  these  fields. 

The  principles  are  the  same  as  in  other  forms  of  in- 
surance. This  insurance  depends  for  its  stability  upon 
the  ability  of  insurance  companies  to  measure  the  prob- 
able amount  of  sickness  or  accidents.  Sickness  and  ac- 
cidents occur,  like  other  hazards,  with  a  fair  degree  of 
regularity.  Barring  the  risk  of  a  serious  mine  or  factory 
disaster  or  an  epidemic,  the  rates  of  sickness  and  acci- 
dent for  a  year  can  be  accurately  measured  for  large 
groups  of  people. 

Experience  has  shown  about  how  man}-  accidents  will 
take  place,  how  many  men  will  be  sick,  and  the  average 
length  of  disability.  Among  a  million  men  it  is  a  fairly 
well  established  fact  that  the  average  sickness  will  be  not 
more  than  nine  days  each,  and  the  average  loss  of  work- 
ing time  will  be  about  seven  and  one-half  days.  Sickness 
insurance  of  1,000,000  men  must  therefore  provide 
enough  to  pay  for  7,500,000  days  of  lost  time  at  the 
rate  fixed,  plus  the  cost  of  conducting  the  business  and 
the  cost  of  medical  care  if  such  care  is  provided.  The 
total  cost  of  accidents  can  likewise  be  fixed  from  expe- 
rience. 

Special  Hazards  and  Experience  Rating 

In  any  form  of  sickness  or  accident  insurance,  account 
must  be  taken  of  some  important  factors.  Some  occu- 
pations are  more  dangerous  than  others,  and  in  some  the 


196      FXONOMICS  AND  THE  COMMUNITY 

rate  of  sickness  far  exceeds  others.  Sickness  increases 
with  age.  The  age  of  the  insured  must  therefore  be 
taken  into  account  in  sickness  insurance.  The  occupa- 
tions must  be  rated  also  as  to  accident  hazards,  and  rates 
must  be  fixed  accordingly.  The  rating  for  office  work- 
ers is  naturally  very  low,  while  that  of  coal-miners  is 
high.  When  experience  tells  whether  a  rate  is  too  high 
or  too  low  in  a  given  occupation,  it  may  be  adjusted. 
This  is  called  experience  rating.  Fire  insurance  compa- 
nies likewise  fix  different  rates  on  different  hazards,  ac- 
cording to  the  degree  of  risk. 

Carriers 

The  first  carriers  of  insurance  were  individuals  who 
commanded  large  capital.  There  are  still  a  few  indi- 
vidual insurers  to-day;  but  as  a  usual  thing  the  corpora- 
tion takes  the  place  of  the  individual.  Some  corpora- 
tions are  engaged  in  the  business  for  profit;  others  are 
mutual  companies  which  divide  the  profits  among  the 
policy-holders  after  paying  losses  and  expenses.  Assess- 
ment companies  are  mutual  companies  which  make  up 
the  losses  by  assessments  upon  the  policy-holders  after 
they  occur.  Fraternal  insurance  companies  are  mutual 
companies  which  have  certain  lodge  features  attached. 

Mutual  insurance  is  found  on  an  extensive  scale  among 
farmers;  the  losses  from  fire  are  collected  by  assessment 
from  those  joining  the  mutual  company. 

Public  or  Social  Insurance 

When  the  insurance  on  any  risk  is  conducted  by  the 
government  to  cover  a  certain  loss,  it  is  called  state  in- 


INSURANCE  197 

surance.  Some  states  have  hail  insurance  by  taxation. 
Each  acre  of  farm-land  is  taxed  a  proportionate  amount, 
and  losses  from  hail  are  paid  from  the  fund  thus  cre- 
ated. In  this  case  the  tax  becomes  the  premium.  Several 
states  require  banks  to  pay  a  certain  percentage  of  de- 
posits into  a  deposit  insurance  fund  from  which  deposi- 
tors who  lose  money  in  banks  that  fail  are  paid. 

When  the  government  provides  or  requires  the  insur- 
ance of  individuals  against  sickness,  accident,  unemploy- 
ment, old  age,  or  death,  this  protection  is  called  social 
msurance. 

In  some  states  employers  are  compelled  to  insure  their 
workmen  against  accidents  in  a  state  fund.  The  stale 
collects  the  money  and  pays  the  losses  to  workers.  It 
has  been  proposed  that  the  health  of  people  be  insured 
by  collecting  from  all  workers  and  employers  a  fund  to 
pay  losses  from  sickness,  and  that  the  state  require  the 
collection  of  a  fund  to  insure  workers  against  failure 
to  get  work.  Likewise  proposals  are  made  to  collect 
money  by  taxation  or  assessments  upon  everyone  to 
insure  that  those  who  live  to  be  old  will  not  be  destitute. 
All  of  these  are  forms  of  social  insurance.  The  princi- 
pal value  of  collecting  and  administering  such  insurance 
through  the  government  is  that  the  cost  is  collected  more 
easily,  and  therefore  it  is  cheaper  for  the  persons  insured. 

Other  Forms  of  Insurance 

Liability  insurance  is  a  very  common  form  of  insur- 
ance. An  employer  who  is  liable  to  his  workmen  for 
injuries  may  insure  himself  against  the  liability  through 
insurance  companies.     Automobile-owners   insure  them- 


198       ECONOMICS  AND  THE  COMMUNITY 

selves  ag^ainst  the  possibility  that  they  may  cause  dam- 
age to  others  and  be  Hable  for  the  losses. 

Burglary  insurance  provides  for  losses  incurred 
through  burglary.  An  important  feature  of  this  insur- 
ance is  the  system  of  detection  and  prosecution  of  bur- 
glars. Private  detective  agencies  are  employed  by  the 
companies  for  this  purpose. 

Fidelity  insurance  secures  an  employer  against  the 
dishonesty  of  an  employee.  If  an  employee  embezzles 
money  or  valuables  from  an  employer,  the  insurance 
company  stands  the  loss.  In  this  case  diligent  search  and 
prosecution  by  the  comj)any  deters  people  from  embez- 
zling. The  losses  from  plate-glass  breakage,  boiler  ex- 
plosions, defective  titles  to  property,  and  elevator  acci- 
dents are  other  objects  of  insurance. 

Prevention  and  Insurance 

In  every  kind  of  insurance  it  is  clear  that  if  the  calam- 
ity is  prevented,  payment  for  the  loss  will  not  have  to  be 
made.  It  pays,  therefore,  to  prevent  fires,  accidents, 
sickness,  deaths,  burglary,  explosions,  bank  losses,  and 
embezzlement.  The  insurance  carriers  gain  by  preven- 
tion, l>ecause  the  losses  for  which  they  must  pay  are  not 
as  great  as  they  would  be  otherwise.  The  insured  per- 
sons gain  in  the  long  run  by  the  reduction  of  premiums. 

The  value  of  prevention  is  so  apparent  that  great  na- 
tional movements  are  under  way,  such  as  the  safety  first 
movement,  the  fire  prevention  cam])aigns,  and  the  pre- 
vention of  sickness  and  death  by  public  health  agencies. 

Prevention  helps  to  reduce  the  occurrence  of  the  event 
insured  against,  Init  it  is  not  a  substitute  for  insurance. 


INSURANCE 


199 


After  everytliing  has  been  done  that  can  be  done,  there 
will  still  be  losses.  Deaths,  sickness,  accidents,  and  fires 
will  occur  in  spite  of  the  most  effective  measures  of  pre- 
vention. When  they  do  occur  insurance  distributes  the 
losses,  thereby  taking  the  excessive  loss  from  the  victims 
of  the  calamity. 


Fire  ruins  of  a  city 

Public  Regulation 

The  business  of  insuring  risks  involves  the  collection 
of  premiums  to-day  for  possible  losses  next  week  or  next 
year.  In  the  case  of  life  insurance  the  premiums  are  col- 
lected to  pay  beneficiaries  many  years  later.  It  is  very 
important,  therefore,  that  the  business  be  conducted  at 
all  times  on  sound  principles  to  prevent  failure  and  pro- 
vide the  money  when  due. 


I'iles  of  reports  made  to  New  York  Department  of  Insurance  by 
insurance  companies  doinj^  business  in  New  York  State 


200 


INSURANCE  20I 

Insurance  carriers  are  subject  to  supervision  Ijy  the 
states.  Every  state  has  a  superintendent  of  insurance,  or 
an  official  performing  the  function  of  a  superintendent, 
whose  duties  are  to  examine  all  insurance  companies  to 
determine  whether  they  are  financially  sound  and  care- 
fully and  honestly  conducted.  Such  supervision  is  nec- 
essary because  of  the  importance  of  insurance  to  the 
people,  and  because  the  nature  of  the  business  is  such 
that  the  individual  can  not  readi.'y  protect  himself  against 
clever  schemes  that  are  sometimes  carried  on  under  the 
guise  of  insurance. 

Questions  and  Problems 

1.  Define  insurance. 

2.  Formulate  questions  for  further  information  and  sub- 

mit the  same  to  well-informed  insurance  agents. 

3.  Obtain  full  explanation  of  the  premium-payment  plans, 

such  as  the  level  rate,  twenty-pay,  thirty-pay,  term 
policy,  etc.,  from  local  agents. 

4.  What  is  meant  by  the  term  "expectation  of  life"? 

5.  \\'hat  is  the  difference  between  insurance  and  gambling? 

6.  If  an  insurance  company  should  insure  a  fair  against 

the  possibility  of  a  stormy  day,  would  that  be  insur- 
ance or  gambling? 

7.  What  is  reinsurance?     Show  how  it  works  in  fire  in- 

surance, life  insurance,  liability  insurance. 

8.  What  is  social  insurance?     What  are  the  advantages 

and  disadvantages  of  social  insurance? 

9.  Show  the  importance  of  exact  statistics  in  the  insurance 

business. 

10.  Show  how  prevention  helps  the  insurance  business. 

11.  Should  an  insured  person  expect  to  get  back  the  money 

paid  in  premiums? 

12.  Suppose  that  every  insured  person  should  be  disabled 

by  sickness  or  accident  long  enough  each  year  to 
receive  as  much  as  he  had  paid  in :  what  would  be 
the  effect  on  the  business  ? 


202      ECONOMICS  AXD  THE  COMMUNITY 

13.  Most  accident  and  sickness  insurance  requires  that  no 

payments  be  made  for  a  few  days.  This  is  called 
the  waiting  period.     Why  is  such  a  plan  desirable? 

14.  Which  would  be  the  better  insurance  against  accidents 

or  sickness:  (a)  payments  after  three  days,  but  stop- 
ping at  twenty-six  weeks,  or  (6)  payments  beginning 
after  thirty  days  and  lasting  as  long  as  the  disability 
lasts  ? 

15.  How  are  insurance  companies  regulated  in  your  state? 
It).     Get  information  about  the  plans  and  workings  of  any 

mutual  fire  insurance  companies  in  your  community, 
such  as  farmers'  mutuals. 

References 

Fetter,  Modern  Econoonic  Problems,  Chapters  12  and  24. 
Gephart.  Principles  of  Insurance. 
Huebners,  Life  Insurance. 
Seager,  Social  Imnrance. 


CHAPTER  XIII 

SAVINGS    AND    INVESTMENT 

Community  Survey 

1.  What  different  kinds  of  savings  institutions  are  in  your 

community  ? 

2.  Describe  each. 

3.  Find  out  the  amount  of  savings  in  each  institution. 

4.  Collect  information  and  reports  from  all  such  savings 

institutions. 

5.  Secure  specimen  forms  of  mortgages,  bonds,  preferred 

stock,   common   stock,   and   study  the   provisions   in 
detail. 

People  save  money  and  accumulate  property  for  a  va- 
riety of  reasons.  Some  desire  to  enter  business  on  their 
own  account,  and  accumulate  money  and  property  to  that 
end.  Others  save  for  the  jnirpose  of  providing  for  the 
emergencies  of  life  such  as  sickness,  accident,  unem- 
nloyment,  and  dependent  old  age.  Still  others  accunui- 
late  for  some  specific  object  which  may  be  temi)orary  or 
permanent  in  its  nature,  as,  for  instance,  the  child  who 
saves  his  pennies  to  go  to  the  circus,  or  the  youth  who 
saves  his  money  to  go  to  college.  A  few  misers  save 
merely  for  the  sake  of  saving. 

It  is  hardly  necessary  to  em])hasize  the  importance  of 
saving,  both  to  the  individual  and  to  the  community. 
Every  individual  must  provide  for  his  entire  lifetime, 
or  run  the  risk  of  being  an  object  of  charity.     Business 

20.-, 


204       ECONOMICS  AND  THE  CO:\IMUNITY 

enterprise  depends  upon  the  accumulation  of  capital  in 
the  form  of  money  and  property.  Business  enterprise 
also  depends  upon  the  use  of  the  funds  that  are  made 
up  from  the  savings  of  large  numbers  of  people.  The 
people  and  the  community  prosper  when  there  is  indi- 
vidual thrift  and  business  activity. 

Limits  to  Saving 

There  are  limits  to  saving  beyond  which  the  individual 
can  not  go  without  harm  to  himself  and  his  dependents. 
Those  who  preach  or  practice  thrift  should  remember 
that  the  first  consideration  should  be  the  health  of  the 
individual.  The  first  payment  from  the  daily  or  weekly 
income  must  be  directed  toward  securing  adequate  food, 
clothing,  and  shelter  for  the  worker  and  his  dependents. 
If  a  man  receives  wages  sufficient  to  provide  only  for 
physical  care,  he  can  not  save  without  harm  to  himself 
and  his  dependents.  To  cut  ofif  necessary  food  is  merely 
to  shorten  the  period  of  working  efficiency.  After  the 
material  needs  of  the  worker  and  his  dependents  are  met, 
and  proper  provision  is  made  for  moral  and  educational 
welfare,  any  surplus  may  be  saved.  Thrift  does  not  con- 
sist in  mere  savings,  but  in  the  wise  use  of  income. 

We  are  concerned  in  this  chapter  with  the  education 
of  people  in  wise  expenditures  so  as  to  enable  them  to 
save,  and  with  the  provision  of  agencies  to  safeguard 
savings  and  make  them  productive. 

Institutions  for  Savings  and  Investment — Savings  Banks 

The  savings  bank  performs  a  different  function  from 
that  performed  by  the  commercial  bank.     The  purpose 


SAVINGS  AND  INVESTMENT 


205 


of  the  savings  bank  is  to  provide  a  place  where  the  in- 
dividual may  deposit  his  money  and  have  it  invested 
wisely.  The  individual  of  small  means  can  not  invest 
in  securities  of  large  denominations.  The  savings  bank 
solves  the  proljlem  by  l)ringing  together  the  small  sav- 
ings of  a  large  number 
of  individuals  and  serv- 
ing as  a  medium  of  in- 
vestment. 

The  widespread  use  of 
the  savings  bank  is  indi- 
cated by  the  fact  that  in 
1919  there  were  1719 
savings  banks  in  the 
United  States  with  a  to- 
tal of  deposits  of  nearly 
$6,000,000,000. 

The  savings  bank  does 
not  engage  in  making 
loans  to  individuals  or 
to  business  men.  The 
funds  of  the  bank  are, 
for  the  most  part,  loaned 
on  real  estate,  mortgages, 
and  bonds.  The  loans  are  for  longer  periods  than  com- 
mercial loans.  Special  regulations  are  made  by  law  to 
safeguard  their  funds,  and  to  that  end  savings  banks 
are  permitted  to  invest  in  specified  investments  only. 

There  are  two  kinds  of  savings  banks — the  mutual 
and  the  stock  savings  bank.  The  former  are  not  con- 
ducted for  profit,  while  the  latter  are  conducted  for  profit. 


A  line  of  bank  depositors 


2o6      ECONOMICS  AND  THE  COMMUNITY 

Many  of  the  mutual  savings  banks  arose  because  of  the 
desire  on  the  part  of  able  business  men,  who  had  the 
welfare  of  the  people  at  heart,  to  provide  for  the  safe- 
guarding of  the  workman's  small  savings  and  to  help  him 
invest.  In  many  instances  such  banks  were  run  at  small 
cost,  because  the  directors  served  without  compensation, 
in  the  interest  of  their  fellow-men.  The  stock  savings 
bank  was  a  later  development.  These  banks  seek  to  aid 
the  men  of  small  means  to  safeguard  and  invest  their 
savings  through  a  commercial  organization  conducted 
for  profit. 

The  deposits  in  savings  banks  l)ear  interest  usually 
from  the  day  of  deposit.  Deposits  may  be  withdrawn 
at  any  time,  but  the  bank  reserves  the  right  to  require 
a  notice  of  withdrawal.  Because  of  the  fact  that  these 
banks  were  intended  to  serve  people  of  small  means,  the 
amount  that  any  one  person  may  deposit  is  usually  lim- 
ited. This  provision  is  not  very  effective,  inasmuch  as  a 
man  might  carry  savings  accounts  in  several  savings 
banks  if  he  found  it  to  his  advantage. 

Savings  banks  maintain  a  reserve  fund,  but  because 
of  the  permanent  nature  of  the  majority  of  the  deposits, 
and  owing  to  the  requirements  for  notice  of  withdrawal, 
the  reserve  is  usually  very  small.  Because  of  the  greater 
permanence  of  deposits,  also,  savings  banks  are  enabled 
to  invest  in  loans  having  a  longer  time  to  run,  such  as 
mortgages  and  bonds. 

The  savings  bank  as  a  separate  institution  will  prob- 
ably not  increase  greatly  in  numbers  in  the  future.  The 
risk  of  starting  new  institutions  is  so  great  that  the  de- 
velopment of  the  future  will  probably  be  in  the  direction 


SAVINGS  AND  INVESTMENT  207 

of  savings  departments  of  state  and  national  banks  and 
of  trust  companies.  The  permission  of  the  Federal  Re- 
serve Board  given  to  national  banks  to  establish  savings 
departments  will  doubtless  cause  great  extension  in  the 
use  of  the  national  banks  as  savings  institutions.  There 
are  some  sections  of  the  country,  however,  where  savings 
banks  are  so  well  known  and  highly  thought  of  that  they 
will  be  favored  for  many  years,  in  preference  to  any 
other  form  of  institution. 

Postal  Saz'ings  Banks 

The  United  States  government  established  a  postal  sav- 
ings bank  system  in  191 1,  following  the  example  of 
European  countries  where  such  a  plan  had  been  in  force 
for  years.  The  system  is  conducted  by  a  board  of  trus- 
tees composed  of  the  Postmaster-General,  the  Secretary 
of  the  Treasury,  and  the  Attorney-General,  and  is  oper- 
ated in  connection  with  the  postoffices  of  the  country. 
The  postal  savings  bank  is  in  reality  not  a  bank  at  all, 
but  merely  an  agency  to  receive  savings  and  deposit  them. 
It  does  not  hold  the  funds  deposited,  but  places  them  in 
approved  banks. 

The  purpose  of  the  postal  savings  bank  is  to  make 
available  to  every  person  facilities  for  savings,  even 
though  he  be  living  in  the  remotest  towns  where  banks 
are  not  at  hand.  The  system  was  designed  also  for  the 
purpose  of  encouraging  people  to  bring  their  savings 
out  of  hiding-places.  Many  timid  people  who  are  afraid 
of  commercial  institutions  are  not  afraid  of  the  govern- 
ment. Large  numbers  of  immigrants,  accustomed  to  the 
postal  savings  banks  of  their  own  countries,  it  was  be- 


2o8      ECONOMICS  AND  THE  COMMUNITY 

lieved,   Avoiild   find   the   postal   savings   system   of   great 
service. 

Any  person  over  ten  years  of  age  may  be  a  depositor, 
and  may  deposit  as  small  a  sum  as  one  dollar.  It  was 
at  first  provided  that  no  one  could  have  a  deposit  greater 


Postal  Savings  Department,  New  York  City  Post  Office 


than  five  hundred  dollars.  This  was  later  changed  to 
permit  a  deposit  of  one  thousand  dollars,  and  an  addi- 
tional deposit  of  one  thousand  dollars  without  interest. 
The  postal  savings  system  had  a  rapid  extension  over 
the  country,  and  in  191 6  there  were  about  six  hundred 
thousand  depositors.  Since  that  time  there  has  been  a 
decrease  in  the  amount  of  deposits  and  in  the  number  of 


SAVINGS  AND  INVESTMENT 


209 


depositors,  owing  to  the  opportunities  afiforded  to  people 
of  small  means  to  purchase  liberty  bonds  and  war  savings 
stamps.  These  investments  pay  a  much  larger  rate  of 
interest  and  are  therefore  favored.  Yet,  in  spite  of  this 
fact,  there  were,  in  1919,  565,509  depositors,  and  a  total 
of  more  than  $167,000,000  on  deposit. 

JVar  Savings  Stamps 

With  the  advent  of  the  war  a  plan  of  saving  was 
authorized  by  Congress  to  provide  for  the  investment 
of  small  savings  of  men,  women  and  children.  Thrift 
stamps  were  sold  at 
twenty  -  five  cents 
each,  and  war  sav- 
i  n  g  s  certificates 
were  sold  in  vary- 
ing amounts.  The 
holder  of  thrift 
stamps  was  per- 
mitted to  transfer 
the  stamps  into  cer- 
tificates. The  war 
savings  certificates 
were  made  payable 
in  five  years.  They  were  purchasable  at  an  amount  which, 
at  four  and  one-half  per  cent  interest,  would  equal  the  face 
of  the  certificate  when  due.  Thus  a  five-dollar  war 
savings  certificate  could  be  bought  for  a  sum  less  than 
five  dollars,  which  at  interest  would  equal  five  dollars 
when  it  was  payable. 

The  patriotic  campaigns  of  the  war  made  the  thrift 
stamps  and  war  savings  certificates  very  popular,   and 


1921 


THRIFT    STAMPS 
TRtASURY  SAVINGS  STAMPS 
TREASURY  SAVINGS  CERTIFICATES 
HERE 


Thrift  poster 


2IO      KCONOMICS  AND  THE  COMMUNITY 

millions  of  persons  invested  their  small  savings  in  this 
way.  So  pojnilar  was  the  system  of  saving  that  it  has 
been  continued.  Opportunity  is  now  afforded  to  invest 
small  savings  in  United  States  treasury  certificates  on  a 
plan  similar  to  that  used  in  the  war  savings  stamp  plan. 
The  liberty  bonds  of  small  denominations,  purchasable 
by  monthly  i)aymcnts,  also  became  and  continue  to  be  a 
popular  form  of  savings  investment. 

ScJwol  Banks  and  Penny  Banks 

Many  devices  have  been  worked  out  to  encourage  peo- 
ple to  establish  the  habit  of  saving  small  amounts.  Many 
schools  have  adopted  the  plan  of  school  savings  banks. 
Pupils  are  encouraged  to  make  deposits  of  their  pennies 
and  nickels,  in  lieu  of  spending  them  for  candy  and  sodas. 
Some  industries  have  adopted  the  same  plan  for  workers. 
Other  industries  have  secured  branches  of  savings  banks 
and  institutions  in  their  plant  to  encourage  savings  and 
provide  safe  investment. 

All  of  these  devices  are  intended  as  a  means  of  educa- 
tion to  turn  people's  attention  to  the  need  for  saving,  and 
to  give  opportunities  for  saving  and  investing  small 
amounts. 

Building  and  Loon  Associations 

Building  and  loan  associations  are  cooperative  enter- 
prises for  the  collection  of  regular  dues  from  members 
for  the  purpose  of  supplying  funds  for  building  homes 
or  paying  for  homes.  These  associations  have  been  in 
existence  since  1831,  and  in  some  states  have  a  wide- 
spread influence  as  a  means  of  saving  and  investment. 


SAVINGS  AND  INVESTMENT 


211 


There  were  in  1920  more  than  three  milHon  members  of 
building  and  loan  associations,  with  assets  of  about  a  bil- 
lion and  a  half  dollars. 

These  associations  are  ojjerated  on  a  mutual  plan.  The 
officers  are  elected  by  the  meml>ers,  and  generally  receive 
small  salaries.     The  members  of  the  association  pay  in  a 


Teaching  habits  of  thrift  through  tlie  school  bank 


certain  amount  regularly,  and  when  the  amount  of  money 
on  hand  is  sufficient,  it  is  lent  to  one  of  the  meml}ers  for 
the  purpose  of  building  or  paying  for  a  home. 

Whenever  a  person  borrows  from  a  building  and  loan 
association  he  subscribes  for  shares  in  the  association 
equal  to  the  amount  of  his  loan.  The  borrowers  regu- 
larly pay  back  into  the  association  the  money  they  bor- 


212      ECONOMICS  AND  THE  COMMUNITY 

rowed,  and  this  money,  together  with  that  paid  in  by 
other  members,  constantly  provides  money  to  lend  to 
other  people,  who  in  turn  become  subscribers. 

There  have  been  several  different  plans  in  use.  One 
is  called  the  permanent  plan,  under  which  all  shares  be- 
gin at  the  same  time  and  mature  at  the  same  time.  When 
the  shares  are  all  matured,  the  association  starts  again. 
Under  this  plan  there  are  very  few  funds  to  lend  while 
the  association  is  young,  and  very  large  funds  toward 
the  end  when  the  shares  are  nearly  paid  up.  The  serial 
plan  was  devised  to  meet  the  difficulties  of  the  permanent 
plan.  Under  this  plan  new  series  of  stock  are  issued  at 
intervals,  and  mature,  therefore,  at  intervals,  thus  keep- 
ing a  steady  flow  of  money  coming  in,  without  accumu- 
lating large  sums  at  one  time.  The  continuous  plan  pro- 
vides that  when  a  man  joins,  his  shares  begin  at  that 
date.  This  makes  a  more  even  flow  of  money  and  pre- 
vents excessive  accumulations. 

The  income  of  the  building  and  loan  associations  is 
derived  from  interest  on  its  surplus  deposited  in  banks; 
from  interest  on  the  loans  made  to  individuals;  from 
regular  payments  made  by  members  on  their  shares  of 
stock ;  from  fines  for  delinquency  in  payment ;  for  premi- 
ums charged  on  loans,  or  deductions  on  account  of  with- 
drawal of  members  before  the  maturity  of  shares.  The 
earnings  of  the  association  derived  from  interest,  fines, 
premiums,  and  deductions  are  distributed  every  six 
months  and  placed  to  the  credit  of  the  shareholders  in 
proportion  to  their  shares. 

The  building  and  loan  associations  have  given  a  great 


SAVINGS  AND  INVESTMENT  213 

impetus  to  savings  because  of  the  association  of  savings 
with  home-building  and  owning.  Almost  every  person 
has  the  desire  to  own  his  home.  The  coupling  of  this 
desire  with  the  means  of  its  attainment  has  made  build- 
ing and  loan  associations  deservedly  popular.  The  divi- 
dends paid  on  the  shares  of  building  and  loan  associations 
usually  give  a  much  higher  rate  of  interest  on  the  money 
invested  than  is  secured  in  other  forms  of  savings  insti- 
tutions.    This  is  an  additional  reason  for  popularity. 

Building  and  loan  associations  are  subject  to  regula- 
tion by  state  authorities.  In  some  states  regulation  is 
exercised  through  a  special  department  of  the  state  gov- 
ernment, and  in  some  as  a  part  of  the  duties  of  the  state 
auditor  or  some  other  state  ofificial.  Regulation  is  im- 
portant to  prevent  unsound  business  practices  and  un- 
wise or  dishonest  use  of  the  funds. 

Insurance  as  Saznngs 

Insurance  as  a  method  of  saving  is  coming  into  wide- 
spread use  as  insurance  principles  become  better  under- 
stood. The  object  of  saving  is  to  provide  for  a  future 
good  out  of  a  present  surplus.  The  object  of  insurance 
is  to  provide  for  future  contingencies  by  small  payments 
from  month  to  month  or  from  year  to  year. 

The  thrifty  workman  saves  to  provide  a  fund  to  carry 
him  over  a  possible  disability,  and  to  give  him  the  means 
of  livelihood  after  his  working  days  are  over.  The  wage 
system  takes  little  account  of  the  fact  that  the  man  to 
whom  a  wage  is  paid  must  have  support  during  sickness 
and  in  old  age.     The  thrifty  man  understands  this,  and 


214       ECONOMICS  AND  THE  COMMUNITY 

makes  his  wage  a  lifetime  wage  if  possible,  rather  than 
a  daily  wage,  by  saving  a  certain  portion  to  provide  for 
later  times  when  he  is  not  working. 

Insurance  is  a  means  by  which  men  can  provide  more 
certainly  for  their  disabilities  in  sickness,  accident,  and 
old  age.  The  payment  of  a  small  sum  regularly  is  an 
investment  against  the  time  of  disability.  The  thrifty 
worker  considers  also  his  dependents  and  their  care  after 
his  death.  Life  insurance,  which  makes  provision  for 
dependents,  is  a  saving  and  investment  to  that  end. 

Some  policies  of  life  insurance  provide  especially  for 
saving.  Endowment  policies  are  an  example,  in  which  a 
greater  premium  is  charged  than  the  present  cost  of  in- 
surance, and  the  balance  accumulates  with  interest.  The 
twenty-year  payment,  twenty-five-year  payment,  and 
thirty-year  payment,  and  similar  policies,  are  also  an  in- 
vestment because  of  the  fact  that  the  accumulation  of 
these  payments  creates  a  fund  sufificient  to  pay  the 
premiums  from  the  end  of  the  twenty-,  twenty-five-,  or 
thirtv-year  period  to  the  end  of  the  life  of  the  insured. 
Many  policies  of  life  insurance  provide  for  the  repayment 
at  certain  times  of  a  guaranteed  amount  with  the  interest 
accumulations. 

Investments 

When  money  has  been  saved  and  accumulated  the  next 
step  is  its  investment.  W^e  have  already  seen  how  savings 
institutions  help  the  small  investor  to  invest  his  savings. 
In  investing  there  are  certain  things  that  should  be  de- 
manded by  the  person  who  has  accumulated  savings. 
First,  the  investment  should  be  safe;  second,  it  should 


SAVINGS  AND  INVESTMENT  215 

bring  a  fair  return  in  interest;  third,  it  should  be  readily 
salable.  Wise  investors  balance  these  requirements  so  as 
to  get  the  largest  possible  return  with  safety,  and  to  en- 
able them  to  sell  their  investment  if  pressing  need  should 
come  for  them  to  do  so. 

There  are  some  investments  that  are  entirely  sound, 
but  that  pay  only  a  small  rate  of  interest.  United  States 
government  bonds  of  the  earlier  issues  are  of  this  char- 
acter, since  they  pay  but  two  and  one  half  or  three  per 
cent.  Other  investments  oflfer  a  high  rate  of  interest, 
but  may  not  be  fully  relied  upon  as  to  their  safety.  Still 
others  may  be  sound  and  have  a  fair  rate  of  return,  but 
because  of  one  condition  or  another  could  not  be  mar- 
keted without  loss  if  the  owner  should  need  to  sell. 

Investment  and  Speculation 

A  clear  distinction  should  be  drawn  between  investment 
and  speculation.  The  speculator  takes  a  chance  on  in- 
vestments of  doubtful  security  offering  a  high  rate  of  ir.- 
terest.  New  enterprises  that  ofifer  possibilities  of  high 
return  are  speculative.  Sound  investments  offer  fair  re- 
turns with  security  and  certainty  of  payment  of  interest 
and  principal. 

Forms  of  Investment — Land 

The  ownership  of  land  offers  a  sound  investment  to 
those  who  are  expert  enough  to  judge  land  values.  The 
return  is  uncertain,  however,  and  increase  in  values  is 
dependent  upon  economic  conditions.  Few  people  are 
able  to  judge  land  values,  and  must  depend  upon  the 
opinion  of  others.     Lands  are  not  always  salable  readily, 


2i6      ECONOMICS  AND  THE  COMMUNITY 

hence  for  the  investor  of  moderate  means  it  does  not  in 
every  case  measure  up  to  the  requirements  of  a  fair  in- 
come, certainty  of  payment,  security  of  investment,  and 
salability. 

Mortgages 

Mortgages  are  claims  upon  property  which  is  usually 
worth  twice  as  much  as  the  amount  of  the  claim.  They 
bring  a  fair  rate  of  interest,  and,  if  they  are  secured  by 
insurance  against  the  loss  of  property  by  fire  or  by  de- 
fective title,  they  furnish  certainty  of  payment.  Mort- 
gages are  favored  forms  of  investment  and  may  generally 
be  readily  sold. 

Mortgages,  however,  depend  upon  the  expert  knowl- 
edge of  land  values  and  of  the  legal  forms  required.  This 
information  is  not  usually  available  to  the  small  investor. 
Mortgages  are  usually  for  amounts  of  considerable  size, 
and  are,  for  that  reason,  not  available  for  small  investors. 

Bonds 

Bonds  are  another  favored  form  of  investment.  Bonds 
of  private  enterprises  are,  in  fact,  merely  parts  of  a 
mortgage.  They  are  usually  based  upon  a  mortgage :  for 
instance,  a  railroad  company  will  give  a  mortgage  for 
one  million  dollars,  representing  one  half  the  value  of 
the  property  mortgaged.  Upon  the  security  of  the  mil- 
lion-dollar mortgage,  bonds  are  sold  to  the  amount  of 
one  million  dollars,  in  denominations  of  varying  amounts. 
Any  person,  by  the  purchase  of  one  of  these  bonds,  be- 
comes a  part-owner  of  the  mortgage. 

Mortgages  upon  real  estate  are  being  handled  in  the 


SAVINGS  AND  INVESTMENT  217 

same  way  to  an  increasing  extent.  The  burden  of  ex- 
amining the  property  and  the  conditions  of  the  mortgage 
are  carried  by  experts  in  the  employ  of  financial  institu- 
tions. When  a  good  financial  institution  has  passed  upon 
the  mortgage  itself  the  investors  in  the  bonds  are  rea- 
sonably secure  in  their  investment.  Bonds  approved  by 
strong  financial  houses  bring  a  fair  return  in  interest. 
They  are  safe  and  in  the  case  of  the  better  known  issues 
they  are  salable  without  loss. 

Government  bonds,  municipal,  state  and  national,  are 
generally  the  best  investments,  because  they  are  safe,  cer- 
tain of  payment,  bear  a  fair  rate  of  interest,  may  be 
marketed  readily,  and  are  not  subject  to  taxation. 

Preferred  Stocks 

Many  corporations  issue  preferred  stocks  paying  a 
fairly  high  rate  of  interest.  Preferred  stock  has  a  prior 
claim  to  the  common  stock  upon  the  property  of  the  cor- 
poration, and  no  dividends  can  be  paid  upon  the  common 
stock  until  the  interest  specified  for  the  preferred  stock 
is  fully  paid.  If  the  business  is  successful,  preferred 
stocks  give  security,  a  high  rate  of  interest,  and  a  fair 
degree  of  salability.  If  the  business  is  not  successful, 
there  is  no  certainty  of  interest,  security,  or  salability. 
If  a  corporation  has  issued  bonds  in  large  amounts  also, 
the  preferred  stock  becomes  an  uncertain  investment, 
since  the  bonds  and  debts  of  a  corporation  would  have  a 
claim  prior  to  the  preferred  stock. 

There  are  some  issues  of  preferred  stock  that  are  a 
good  investment,  but  great  care  should  be  exercised  to 
understand  fully  the  condition  of  tJie  company  and  the 


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SHAPES  $  1000  00  S  SCO  EACH 

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-./.. 


A  railroad  bond 
3l8 


terms  upon  which  the 
stock  is  issued.  Pre- 
ferred stock  should  not 
be  confused  with  bonds. 
Bonds  represent  actual 
property  upon  which 
they  have  a  first  claim. 
Preferred  stock  repre- 
sents an  interest  in  a 
corporation.  If  a  cor- 
poration is  successful 
the  stock  is  secure;  if  it 
is  not  successful  the  in- 
vestment may  be  entire- 
ly lost. 

Common  Stock 

The  common  stock 
of  a  corporation  is 
usually  speculative.  One 
who  invests  in  common 
stock  takes  the  risk  that 
the  company  will  be 
successful.  If  it  is  suc- 
cessful the  profits,  after 
paying  expenses  and  in- 
terest charges,  are  di- 
vided among  the  com- 
mon stockholders  and 
may  amount  to  an  ex- 
tremely hi^h  rate  of  in- 
terest.    On    the    other 


SAVINGS  AND  INVESTMENT        219 

m 


Part  of  the  coupons  of  the 
railroad  bond 


220      ECONOMICS  AND  THE  COMMUNITY 

haiul.  if  the  company  is  not  successful,  or  if  it  fails,  the 
investment  may  be  largely  or  entirely  lost. 

Co)ic!nsion 

It  will  be  seen,  from  this  discussion  of  kinds  of  in- 
vestment, that  the  small  investor  needs  to  exercise  great 
care  to  safeguard  his  savings  and  at  the  same  time  secure 
a  fair  return  in  interest.  The  importance  of  stable  in- 
stitutions, such  as  savings  banks,  savings  departments 
of  commercial  banks,  postal  savings  banks,  and  building 
and  loan  associations,  should  be  apparent.  They  spe- 
cialize in  accumulating  the  small  funds  from  millions  of 
people,  and  provide  safe  investments  for  people  of  small 
means  who  can  not  afiford  to  run  any  risk  of  speculation. 

Questions  and  Problepts 

1.  Discuss  fully  the  value  of  savings  to  the  individual  and 

to  the  community. 

2.  What  are  the  limits  of  saving  for  the  individual? 

3.  What  is  the  relation  between  the  minimum  living  wage 

and  the  ability  to  save? 

4.  Find  out  the  number  of  savings  banks  in  your  city,  and 

learn  the  plan  and  organization  of  each.  Do  the 
commercial  banks  and  trust  companies  have  savings 
departments? 

5.  Study  the  actual  plan  of  o])eration  of  savings  banks  in 

your  city.  How  are  deposits  made?  What  are  the 
rules  regarding  withdrawals?  What  rate  of  interest 
is  paid?     When  do  deposits  begin  to  draw  interest? 

6.  Secure  all  the  information  at  hand  regarding  the  postal 

savings  bank  in  your  city. 

7.  Explain  fully  the  war  savings  stamp  and  certificates. 

Why  are  these  good  forms  of  savings  investment? 

8.  Secure  full  information  regarding  the  plan  of  operation 

of  the  building  and  loan  associations  doing  business 
in  your  community. 


SAVINGS  AND  INVESTMENT  221 

9.     Explain  fully  the  uses  of  insurance  as  a  method  of 
savings. 

10.  What   are   tiie   requirements   of   a   good    investment? 

Explain  fully. 

11.  Why  is  the  ovvnershij)  of   lands  a  good   investment? 

Why  is  it  not  always  a  good  investment? 

12.  Explain  the  advantages  and  disadvantages  of  mortgages 

as  an  investment  for  small  investors. 

13.  l^xplain  the  uses  of  bonds. 

14.  Why  are  bonds  good  investments? 

15.  Explain  the  advantages  and  risks  of  preferred  stock 

as  an  investment. 

16.  Show  why  the  ownership  of  common  stock  is  a  specu- 

lation.    Is    ownership   of    common    stock   always   a 
speculation  ? 

References 

Fetter.  Modern  Economic  Problems,  Chapter  ii. 
Clay,  Economics  for  the  General  Reader,  pages  94-96. 


CHAPTER  XIV 

EMPLOYEES  AND  EMPLOYERS 

Community  Survey 

1.  Make  a  list  of  all  of  the  trade  unions  in  your  com- 

munity. 

2.  What  are  the  hours  of  labor  in  various  employments 

and  the  prevailing  wages  ? 

3.  What  strikes  have  recently  occurred,  if  any,  and  how 

were  they  settled? 

4.  What  are  the  usual  methods  of  employing  workers, 

fixing   wages,    and    determining    the    length    of    the 
working  day  in  the  industries  in  your  community? 

We  have  already  studied  the  part  that  labor,  capital, 
and  management  i)lay  in  the  ])ro(luction  and  distribution 
of  goods.  We  are  now  to  consider  labor  in  the  sense  of 
employee,  and  capital  and  management  in  the  sense  of 
employer.  All  men  who  are  engaged  in  work  are  either 
employers  or  employees.  Some  who  w'ork  for  them- 
selves, such  as  individual  farmers,  are  known  as  self- 
emi)loyers.  The  term  labor,  as  it  has  been  used,  includes 
the  labor  of  superintendents  and  foremen;  those  who 
work  with  brains  as  well  as  those  who  work  with  hands. 
We  are  to  consider  now  the  relations  between  the  em- 
ployee and  the  employer  under  present  conditions. 

The  employer  organizes  the  business,  secures  the  nec- 
essary capital  to  run  it,  employs  managers  and  workmen, 
and  gains  or  loses  according  to  many  factors  that  enter 

222 


EMPLOYEES  AND  EMPLOYERS  223 

into  the  business.  The  employer  takes  the  risk  of  suc- 
cess or  faihire,  which  usually  depends  upon  the  skill  with 
which  the  business  is  organized  and  conducted.  The  em- 
ployee sells  his  labor  to  the  employer  for  a  certain  length 
of  time  at  a  certain  rate  of  pay,  or  for  a  given  piece  of 
work  at  a  certain  rate.  The  em[)loyee  does  not  take  the 
risk  of  the  business,  and  does  not  usually  share  in  the 
profits  or  stand  the  losses.  He  does  share  the  risk,  and 
it  is  a  serious  one,  that  he  may  be  subjected  to  the  hard- 
ships of  unemployment  if  the  business  fails. 

So  far  the  problem  ai)pears  simple.  The  employer, 
seeking  workers,  agrees  with  men  who  seek  the  fruits  of 
labor  to  employ  them  at  certain  rates  of  pay.  The  em- 
ployee, seeking  work,  sells  his  labor  to  the  employer.  A 
man  who  is  dissatisfied  may  refuse  to  work  or  may  quit 
work,  and  a  man  who  is  unsatisfactory  to  the  employer 
may  not  be  hired,  and  if  hired  may  be  discharged.  It  is 
apparently  a  free  bargain  between  the  two  factors. 

The  system  does  not  work,  however,  as  simply  as  it 
would  appear.  The  two  factors  are  not  on  an  equal 
footing.  The  worker  must  find  and  keep  employment, 
because  he  depends  solely  upon  his  daily  labor  for  his 
living  and  the  support  of  his  dependents.  He  can  not  be 
out  of  work  for  a  great  length  of  time  without  distress 
to  himself  and  his  dependents.  The  employer,  on  the 
other  hand,  is  not  dependent  upon  the  hiring  of  any  par- 
ticular man.  Under  such  circumstances  the  employer  has 
power  to  fix  the  wages,  the  hours  of  labor,  and  the  con- 
dition of  working-places.  Under  such  circumstances 
the  worker  must  accept  what  is  offered  to  him.  He  can 
take  the  job  or  seek  another. 


224      ECONOMICS  AND  THE  COMMUNITY 

Collective  Bargaining 
The  weakness  of  the  individual  worker  in  bargaining 
for  employment  has  resulted  in  the  organization  of  men 
in  trade-unions  to  bargain  collectively  with  the  employer. 
Unions  are  now  organized  in  the  majority  of  industries, 
and  all  of  the  workers  in  a  shop  or  trade  cooperate  to 


Meeting  of  railroad  employers  and  employees 

make  a  bargain  with  the  employer ;  committees  selected 
by  the  union  make  a  bargain  with  the  employer  for  all  of 
the  employees.  Under  such  conditions  the  employer  and 
employees  are  more  nearly  equal  in  strength.  This  meth- 
od is  called  collective  bargaining. 

The  organization  of  men  in  trade-unions  for  collective 
bargaining  extends,  in  some  instances,  to  the  union  of 


EMPLOYEES  AND  EMPLOYERS  225 

all  of  the  employees  in  a  given  trade.  Instead  of  a  group 
of  workers  in  a  single  shop  bargaining  with  their  own 
employer,  the  men  of  an  entire  trade  bargain  through 
their  committee  with  a  committee  of  employers  of  the 
same  trade  for  all  of  the  men  and  plants  of  the  trade 
throughout  the  country.  For  example,  the  soft-coal  mine 
operators  have  committees  that  bargain  with  committees 
from  the  miners'  union  for  the  purpose  of  fixing  wages, 
hours  of  labor,  and  conditions  of  work  throughout  vir- 
tually the  entire  soft-coal  region  of  the  country.  The 
railroad  unions,  representing  conductors,  engineers,  fire- 
men, and  trainmen,  sometimes  bargain  for  all  of  their 
members  with  representatives  of  all  of  the  railroads. 

Strikes  and  Lockouts 

Questions  arise  immediately  of  this  sort.  Suppose  the 
bargainers  do  not  agree?  What  if  the  men  refuse  to  ac- 
cept the  wages  offered,  or  the  employers  refuse  to  pay 
the  wages  demanded?  A  deadlock,  in  which  one  side  or 
the  other  refuses  the  terms  or  demands,  is  not  infrequent. 
A  state  of  industrial  warfare  results.  The  men  may  quit 
work,  or  the  employers  may  close  their  plants  or  attempt 
to  substitute  other  workers.  When  the  men  as  a  group 
refuse  to  work  it  is  called  a  strike.  When  an  employer 
closes  his  plant  to  his  former  employees  it  is  called  a 
lockout. 

When  a  strike  is  declared  a  battle  of  endurance  be- 
tween employers  and  employees  generally  follows.  The 
employees  suffer  loss  of  wages,  and  the  employers  suffer 
loss  of  profits  and  markets.  Sometimes  employers  at- 
tempt to  run  their  plants  with  new  men,  known  as  strike- 


226      FXONOMICS  AND  THE  COMMUNITY 

breakers.  The  striking  employees  oppose  the  use  of 
strike-breakers,  and  use  every  means  of  persuasion  to 
prevent  men  from  going  to  work  in  the  places  of  the 
strikers.  Picketing  is  the  term  applied  to  the  activity 
of  strikers  who  stand  near  entrances  to  shops  and  yards 
for  the  purpose  of  persuading  men  not  to  go  to  work. 

The  bitterness  against  strike-breakers  is  often  so  in- 
tense that  acts  of  violence  take  place.  Both  sides  usually 
attempt  to  avoid  violence,  and  each  accuses  the  other  of 
active  interference.  In  the  turmoil  of  strikes  hot-headed 
men  will  sometimes  do  violent  things  that  l)ring  disrepute 
and  criticism  on  them  and  on  their  cause.  The  public 
usually  takes  the  side  of  the  one  who  plays  fairest,  and 
both  employers  and  employees  desire  favorable  public 
opinion. 

Sympathetic  Strikes 

Sometimes  men  in  a  trade  agree  to  strike  in  sympathy 
with  some  other  trade.  A  body  of  street-car  men  may 
be  striking  for  higher  wages,  and  a  body  of  teamsters, 
who  have  no  special  grievance  of  their  own,  may  strike 
to  help  the  cause  of  the  street-car  men.  Occasionally 
threats  are  made  that  all  organized  labor  in  a  community 
will  strike  in  sympathy  with  some  particular  union  that 
is  on  strike.  Such  strikes  are  called  sympathetic  strikes. 
It  very  seldom  happens  that  the  threat  of  a  general  sym- 
pathetic strike  is  carried  out. 

Boycott  and  Blacklist 

Until  recent  years  employees  used  the  boycott  and 
employers  used  the  blacklist  as  weapons  to  defeat  their 
opponent.     Under  the  boycott,  men  agree  not  to  patron- 


EMPLOYEES  AND  EMPLOYERS  227 

ize  certain  places  or  to  buy  the  goods  of  certain  manu- 
facturers who  are  considered  "unfair"  to  labor.  By 
means  of  the  blacklist,  employers  agree  among  themselves 
to  refuse  emi)loyment  to  certain  workmen  who  are  placed 
on  the  blacklist.  These  weapons  have  been  going  out  of 
use,  principally  because  of  legal  prohibition. 

Mediation  and  Conciliation 
A  strike  ends  either  in  the  defeat  of  one  or  the  other  of 
the  parties  to  the  strike,  or  by  the  mediation  of  outside 
parties.  The  states  have  nearly  all  provided  some  public 
agency  to  investigate  the  causes  of  strikes  and  to  attempt 
to  conciliate  the  strikers  and  employers.  The  United 
States  government  has  a  Railway  Labor  Board  to  at- 
tempt to  settle  disputes  in  railway  employment  before 
they  result  in  strikes,  and  to  bring  about  conciliation  or 
arbitration  between  the  parties.  During  the  war  the  War 
Labor  Board  was  created  to  settle  disputes  between  em- 
ployers and  employees,  and  attained  considerable  success. 
It  frequently  happens  that  when  an  impartial  agency  in- 
vestigates the  causes  of  a  strike,  it  influences  the  parties 
to  try  to  settle  their  differences  peaceably. 

Arbitration 

The  method  generally  followed  in  bringing  about  a 
settlement  of  a  strike  or  threatened  strike  is  called  arbi- 
tration. The  usual  plan  of  arbitration  is  the  selection  by 
each  side  of  a  certain  number  of  representatives,  who 
jointly  choose  one  or  more  additional  representatives. 
The  parties  agree  to  accept  the  decision  of  the  arbitrators. 
The  arbitration  board  hears  both  sides,  investigates  the 
conditions,  and  makes  an  award.     If  the  award  is  basad 


228      ECONOMICS  AND  THE  COMMUNITY 

upon  thorough  study  and  a  careful  attempt  at  justice, 
both  sides  usually  accept  it  with  good  feeling. 

Compulsory  Arbitration 

It  happens  sometimes  that  one  side  or  the  other  refuses 
to  accept  arbitration,  or  to  abide  by  an  award  given  by  an 
arbitration  board.  To  meet  these  situations  it  has  been 
proposed  that  a  plan  of  compulsory  arliitratinn  be  tried, 


-^                                   '  »?•        IW     '  1  ['■• 

n 

^j^^  ^  -                111  J  r       11  ■ }    m* 

d 

iHl^HMiBw^ 

^J^^^^^3j^^_^^!r^^       ^'4^", 

1 

A  board  of  arbitration  in  session 

whereby  the  public  would  first  attempt  to  mediate  to 
prevent  a  strike  and  would  investigate  fully  the  causes  of 
the  strike,  and  would  then  compel  the  acceptance  of  the 
award  by  the  employers  and  employees.  Most  people 
agree  that  the  public  has  rights  in  most  controversies  su- 
perior to  any  group  of  employees  or  employers  except  of 
course  when  fundamental  rights  are  at  stake.  There  are 
many  difficulties  in  forcing  the  award  upon  the  parties. 


EMPLOYEES  AND  EMPLOYERS  229 

If  employees  refuse  to  work  they  can  not  be  forced  to  do 
so.  Compulsory  labor  is  a  form  of  slavery.  On  the  other 
hand,  if  an  employer  can  not  run  his  plant  without  loss 
under  an  award,  he  can  not  rightfully  be  forced  to  con- 
tinue operation  for  any  great  length  of  time.  Some  plans 
are  now  being  tried  out  in  the  United  States,  such  as  the 
Kansas  Industrial  Court  Act,  enacted  in  1920.  These 
experiments  are  being  watched  with  keen  interest. 

The  Open  and  Closed  Shop 

One  of  the  causes  of  strikes  in  the  past  has  been  the 
fight  over  the  question  of  the  open  or  closed  shop.  The 
closed  shop  is  one  in  which  only  members  of  a  union  are 
permitted  to  work.  The  open  shop  is  one  in  which  any 
one,  regardless  of  membership  in  a  union,  may  work. 
Many  strong  labor-unions  have  worked  for  the  closed 
shop,  and  in  some  trades  the  closed  shop  prevails.  Em- 
ployers, on  the  other  hand,  generally  demand  the  open 
shop.  Labor-unions  rightly  contend  that  the  open  shop 
means,  in  the  mind  of  many  employers,  a  shop  that  is 
open  only  to  non-union  men  and  closed  to  union  men. 
Some  employers,  w'hile  maintaining  an  open  shop,  bar- 
gain collectively  with  those  of  their  employees  who  be- 
long to  labor  unions.  The  controversy  over  the  open 
and  closed  shop  comes  up  frequently  as  an  industrial 
problem,  and  there  are  widely  varying  views  on  the  sub- 
ject. In  the  main  the  public  believes  that  men  should  not 
be  refused  employment  because  they  belong  to  a  union, 
nor  should  a  man  be  forced  to  join  a  union  to  get  work, 
but  that  the  principle  of  collective  bargaining  should  be 
preserved. 


230     ECONOMICS  AND  THE  COMMUNITY 

Minintton  Living  Wages 

One  of  the  chief  causes  of  dispute  has  been  the  sub- 
ject of  wages.  More  strikes  have  been  carried  on  to 
enforce  wage  standards  than  for  any  other  reason.  Union 
labor,  by  means  of  organization,  has  been  able  to  fix  in 
many  trades  certain  minimum  wages.  Minimum  wages 
have  been  urged  on  the  theory  that  labor  is  not  a  com- 
modity to  be  bought  and  sold  according  to  the  law  of 
supply  and  demand,  but  that  each  human  being  is  en- 
titled to  a  wage  that  will  be  sufficient  to  support  him  ac- 
cording to  the  dignity  of  a  human  being. 

The  idea  of  the  minimum  wage  has  been  taken  up  by 
legislatures,  and  in  a  number  of  states  there  are  already 
state  laws  providing  for  a  minimum  wage  for  women. 
Such  laws  have  been  passed  to  prevent  the  exploitation 
of  women's  work  at  less  than  a  living  wage.  These  laws 
have  been  upheld  by  the  courts  of  the  country.  Mini- 
mum wages  under  these  laws  are  fixed  usually  by  com- 
missions after  investigation  to  determine  the  amount  that 
is  necessary  to  provide  the  worker  a  decent  living.  Some 
states  require  employers  to  pay  the  amount  fixed,  while 
others  provide  merely  for  the  report  of  a  fair  minimum 
wage,  and  then  depend  upon  public  sentiment  to  secure 
the  wage  determined  upon.  In  the  latter  case,  if  a  manu- 
facturer does  not  pay  the  rate  specified,  his  name  may  be 
published  in  the  newspapers,  and  public  opinion  is  deemed 
strong  enough  to  require  his  compliance  with  the 
standard. 

Profit-Sharing 

There  have  been  many  suggestions  for  the  uniting  of 
employers   and   employees   by   means   of    profit-sharing. 


EMPLOYEES  AND  EMPLOYERS 


231 


Many  concerns  have  put  such  schemes  into  operation. 
The  plan  [)rovi(lcs  that  on  some  agreed  basis  tlie  men 
shall  receive,  in  addition  to  their  wages,  a  i)art  of  the 
profits  of  the  business.  Under  this  plan  the  men  are 
given  a  direct  interest  in  the  promotion  of  the  business 


Share  holding  employees  attend  huge  stockholders'   meeting  of  the 
Firestone  Tire  &  Rubber  Co. 

Directors  were  elected  at  this  annual  meeting,  at  which  more  than  95  per  cent 
of   the  stockholders  were  officers  and   employees  of   the    company. 

and  its  efficiency.  The  chief  advantage,  however,  lies 
in  the  better  understanding  that  exists  between  employers 
and  employees  when  all  of  the  facts  regarding  profits  are 
made  known.  When  profits  are  shared  they  must  nec- 
essarily be  divided  on  a  fair  basis,  or  else  the  cause  of 
discontent  will  remain. 


232      ECONOMICS  AND  THE  COMMUNITY 
Labor  Participation  in  Management 

The  next  step  that  has  been  taken  by  several  business 
and  industrial  concerns  in  this  country  is  the  union  of 
employers  and  employees  through  joint  management.  In 
a  number  of  business  concerns  the  men  have  been  invited- 
to  select  from  their  ranks  meml3ers  of  the  board  of  di- 
rectors. Others  have  provided  for  advisory  committees, 
while  in  some  instances  employers  have  invited  employees 
into  the  management  on  equal  terms.  The  chief  advan- 
tage claimed  for  labor's  participation  in  management  is 
that  employers  and  employees  are  brought  together  in 
closer  unity.  Each  comes  to  understand  the  problems  of 
the  other  better  when  they  sit  down  together  to  determine 
policies  and  make  plans  for  the  industry.  The  experi- 
ments now  being  tried  in  some  of  the  larger  indus- 
tries of  the  country  are  being  watched  with  great  in- 
terest. 

Unemployment 

The  most  serious  problem  for  the  employee  is  the  un- 
certainty of  employment.  Many  causes  operate  to  pre- 
vent steady  employment.  Weather  conditions  affect  some 
occupations.  Sickness  and  accident  cause  a  large  loss 
to  many  men.  The  breakdown  of  machinery  or  equip- 
ment keeps  plants  closed  for  days,  or  perhaps  weeks. 
Business  depression  causes  the  labor  forces  to  be  cut  down. 
Many  occupations  can  be  carried  on  only  in  certain  sea- 
sons and  the  workers  in  these  occupations  must  find  other 
employment  or  be  idle  for  a  part  of  the  year. 

All  of  these  causes  result  disastrously  for  the  workers 
aflfected,  because  workers  depend   for  their  living  upon 


1 


EMPLOYEES  AND  EMPLOYERS 


233 


their  daily  wage.  It  is  a  serious  disaster  in  the  life  of 
a  worker  to  be  out  of  em])loyment  for  a  great  length  of 
time.  The  evils  of  unemployment  have  given  rise  to 
discussions  as  to  means  of  stabilizing  employment  so  as 
to  prevent  the  hardships  that   fall  upon  those  who  are 


Public  employment  office 

compelled  to  be  out  of  work.  Employment  bureaus  or 
exchanges  are  provided  for  better  distribution  of  labor. 
Public  works  are  planned  to  take  up  the  slack  in  dull 
times.  Business  is  distributing  its  operations  more  and 
more  throughout  the  year.  Insurance  plans  are  meeting 
some  of  the  difficulties  of  unemployment.  The  problem 
of  assuring  the  chance  for  steady  employment  to  workers 


234       ECONOMICS  AND  THE  COMMUNITY 

is  one  of  the  most  serious  that  confront  the  people  of  this 
country.  ft>r  there  is  no  more  potent  cause  of  unrest  than 
invokmtary  unemployment. 

Health  and  Safety 

Public  attention  is  directed  throughout  the  country  to 
the  conditions  under  which  people  labor.  We  have  come 
to  recognize  the  fact  that  the  individual  can  not  fully 
protect  himself  against  disability  arising  out  of  employ- 
ment, and  that  public  measures  are  needed  to  prevent 
accident  and  disease  in  industry.  Nearly  every  state  in 
the  Union  has,  within  the  last  twenty-five  years,  provided 
for  state  dei)artments  for  the  inspection  of  industrial 
plants.  These  departments  enforce  the  laws  requiring 
safety  devices  for  the  prevention  of  accidents  and  disease, 
thus  promoting  the  health  and  safety  of  workmen.  The 
larger  cities  also  have  similar  departments  to  safeguard 
workers.  This  has  come  about  through  a  clear  insight 
into  the  need  for  healthy  workmen,  who  are  valualjle  not 
only  to  industry  but  to  the  community.  The  safety  first 
movement  for  the  prevention  of  accidents  has  made  rapid 
progress.  That  movement  is  now  being  directed  also 
toward  the  prevention  of  disease. 

Nearly  every  state  has  provided  for  insurance  of 
workers  against  accidents  in  employment.  This  is  known 
as  workmen's  compensation  for  industrial  accidents.  The 
employers  pay  the  cost  of  the  insurance,  which  provides 
for  a  part  of  the  injured  man's  wages  and  for  the  cost 
of  medical  care.  These  laws  are  usually  administered 
and  enforced  by  state  industrial  boards  or  commis- 
sions. 


EMPLOYEES  AND  EMPLOYERS  235 

Hotirs  of  Labor 

The  len<Tth  of  the  working  day  has  been  decreasing  for 
a  good  many  years.  When  factories  were  first  estabhshed 
it  was  common  for  men  to  work  fourteen  and  sixteen 
hours  a  day.  (iratkially  the  length  ui  the  working  day 
was  re(kiced  successively  to  twelve  hours,  ten  hours,  and 
eight  hours.  To-day  the  standard  working  day  is  eight 
hours,  although  there  are  large  numbers  of  employments 
that  still  have  a  ten-hour  day. 

The  shortening  of  the  day  has  come  from  the  demands 
on  the  part  of  the  men  for  more  leisure,  and  also  from 
some  employers,  who  recognize  that  the  shorter  day  pro- 
motes efficiency.  Laws  have  been  enacted  in  several 
states  prohibiting  the  employment  of  women  for  more 
than  eight  hours  a  day.  Laws  have  also  been  enacted 
prohibiting  the  employment  of  men  in  certain  occupations, 
such  as  mining,  for  more  than  eight  hours  a  day.  It  is 
generally  recognized  that  in  monotonous  and  unhealthy 
employments,  and  in  those  in  which  the  workers  are  under 
a  nervous  strain,  the  shorter  day  is  necessary  in  order  to 
preserve  the  physical  well-being  of  the  workers. 


Questions  and  Problains 

What  is  collective  bargaining?     Why  is  it  important 

to  the  workers  ? 
Why    is    it   important    tliat    wages    should    be    similar 

throughout  certain  industries,  such  as  coal-mining? 
What  is  a  strike  ?     A  lockout  ? 
Why  are  the  boycott  and  blacklist  made  illegal  in  many 

states  ? 
Gather  information  and  discuss  fully  the  merits  of  the 

closed  and  the  open  shop. 
It  is  claimed  by  many  that  a  man  can  do  as  much  work 


236      ECONOMICS  AND  THE  COMMUNITY 

in  some  employments  in  eight  hours  as  he  can  m  ten 
hours.     I'",xplain  the  reasons. 

7.  Is  employment  in  your  community  regular  throughout 

the  year,  or  are  some  men  laid  off  during  parts  of 
the  year? 

8.  Study  the  local  industries  and  see  which  ones  lay  off 

men  during  parts  of  the  year. 

9.  What  employments  do  the  men  follow  during  the  time 

they  are  laid  off? 

10.  What  are  the  reasons  for  laying  men  off  at  times? 

11.  How   could  the  evils  of   unemployment   be  best  pre- 

vented ? 

12.  What  is  meant  by  unemployment  insurance? 

13.  In  what  ways  can  the  city,  state  or  nation  aid  to  pre- 

vent unemployment  ? 

14.  What  is  the  function  of  a  factory  inspection  depart- 

ment ? 

15.  DescriJje  fully  the  process  by  which  workmen  are  in- 

sured against  accidents  and  the  process  of  collecting 
the  amount  due  the  injured  worker. 

References 

Fetter,  Modern  Economic  Problems,  Chapters  20-23. 

Beard,  Short  History  of  the  American  Labor  Movement. 

Commons  and  Andrews,  Principles  of  Labor  Legislation 
(revised  edition). 

Ryan,  .1  Living  Wage. 

Ryan,  Social  Reconstruction. 

United  States  Bureau  of  Labor  Statistics,  Monthly  Bul- 
letin and  Special  Reports. 

American  Federation  of  Labor,  Washington,  D.  C. 

National  Association  of  Manufacturers,  New  York  City. 


CHAPTER  XV 

COOPERATION 

Community  Survey 

1.  Secure  examples  in  your  community  where  consumers 

unite  to  buy  goods  and  producers  unite  to  sell  their 
products  by  means  of  cooperative  arrangements. 

2.  Find  out  if  any  local  cooperative  schemes  have  failed, 

and  learn  tiie  reason  for  failure. 

Cooperation  is  a  system  of  business  organization  in 
which  a  numl)er  of  people  join  for  the  common  purpose 
of  buying-,  selling,  producing,  or  distributing  goods,  or  of 
securing  some  other  end  in  common.  Instead  of  the 
organization  of  an  undertaking  by  an  individual,  a  partner- 
ship, or  corporation  for  profit,  the  people  who  are  to  be 
served  form  a  cooperative  society  to  conduct  the  business 
or  secure  the  desired  service  for  their  mutual  benefit. 

Cooperation  may  be  divided  into  the  following  main 
divisions :  Producers'  cooperation,  consumers'  coopera- 
tion, distributors'  cooperation,  and  other  forms  of  co- 
operation. 

Producers'  Cooperation 

The  simplest  form  of  producers'  cooperation  is  found 
in  the  common  ownership  of  certain  kinds  of  farm 
machinery,  such  as  tractors,  ensilage  cutters,  threshing 
machines,  and  power  machinery.  In  some  cases  the  joint 
owners  have  only  an  informal  agreement;  in  others  there 

2i7 


238      ECONOMICS  AND  THE  COMMUNITY 

is  a  cooperative  agreement,  with  fixed  rules  and  regula- 
tions. Professional  workers  also  cooperate  to  provide 
mutual  needs,  such  as  libraries,  laboratories,  and  expensive 
apparatus. 

A  more  elaborate  form  of  producers'  cooperation  is 
found  in  the  cooperative  ownership  of  creameries  and 
cheese  factories.  Such  cooperative  enterprises  are  con- 
ducted under  articles  of  agreement,  and  each  cooperator 


Rural  grain  elevators,  Hettings,  Iowa 

shares  in  the  conduct  of  the  business.  In  some  cases  the 
cooperative  arrangement  is  merely  another  form  of  the 
corporation,  in  which  the  owners  are  stockholders.  A 
real  cooperative  enterprise  is  one  in  which  the  idea  of 
profit  is  secondary  to  the  idea  of  mutual  management  for 
mutual  Ixtnefit. 

A  still  more  elaborate  form  of  producers'  cooperation 
is  found  in  a  few  factories  where  the  workmen  cooperat- 
ing in  the  management  of  the  business  share  the  profits. 


COOPERATION 


239 


This  form  is  rare  in  the  United  States.  Ownership 
and  management  by  workers  alone  is  also  a  rare  form 
in  this  country.  Only  a  few  attempts  have  succeeded 
because  of  the  difficulties  of  combining  labor,  capital,  and 
management    in    the    same    group    of    workers.      Simple 


Courtoay  Diiirymen'.H  Lcnguo 


Cooperative   milk   plant 


industries  lend  themselves  to  this  form.  IMuch  more  suc- 
cess has  been  achieved  in  England  and  in  luiropean  coun- 
tries in  workmen's  cooperative  production  than  in  the 
United  States.  The  famous  Rochdale  system  of  England, 
descril^ed  hereafter,  is  one  of  the  best  examples  in 
European  experience.  An  example  in  this  country  of 
cooperation  in  a  factory  is  found  in  the  Cooper  Shops  in 


240       ECONOMICS  AXD  THE  COMMUNITY 

Minneapolis,  where  for  many  years  a  plan  of  cooperative 
management  has  been  carried  out. 

Cooperative  Distribution 

Cooperation  has  been  found  much  more  successful  in 
this  country  when  applied  to  the  distribution  of  goods 
than  to  their  production.     Numerous  examples  of  suc- 


Exterior  view  of  a  cooperative  store 

cessful  cooperation  can  be  mentioned.  Grain-growers, 
fruit-growers,  and  dairymen  have  used  the  system  exten- 
sively. The  most  notable  examples  on  a  large  scale  are 
found  among  the  fruit-growers  of  the  Pacific  Coast.  In 
that  part  of  the  country  the  individual  fruit-grower  had 
struggled  for  years  against  odds  in  marketing  his  product. 
He  did  not  have  adequate  storage  or  finance.     He  could 


COOPERATION  241 

not,  l)y  himself,  c.stal)lish  standards  or  grades  for  his  fruit. 
He  had  to  depend  upon  the  railroads  for  refrigerator 
service,  and  upon  the  commission  men  in  far  distant  cities 
for  sales.  The  result  was  failure  on  a  widespread  scale. 
Then  came  co(")peration.  The  individual  ])r()ducers,  con- 
fronted with  the  same  problems,  combined  to  provide  com- 
mon facilities  to  store,  transport,  and  sell  their  products, 
to  finance  their  operations,  and  to  grade  and  standardize 
their  products. 

The  advantages  derived  from  cooperation  among  fruit- 
growers have  been : 

1.  Uniform  grading,  which  makes  the  quality  of  the 
fruit  reliable. 

2.  Uniform  and  scientific  packing,  which  adds  to 
appearance  and  salability. 

3.  Better  selection  of  markets  and  better  estimates  of 
the  needs  of  the  market. 

4.  Storage  facilities  to  equalize  the  flow  of  the  fruit 
to  market. 

5.  Utilization  of  surplus  fruit  by  canning,  drying,  or 
preserving. 

6.  Better  shipping  facilities,  including  cooperative  own- 
ership of  refrigerator  cars. 

7.  Adequate  finance  by  cooperative  arrangements  to 
produce  the  crop  and  market  it. 

8.  Cooperative  supply  of  barrels,  boxes,  baskets,  and 
other  essentials  for  packing  and  shipping. 

9.  Improvement  of  the  fruit-growing  industry  by  the 
spreading  of  scientific  and  practical  information  among 
members. 

10.  Increased   facilities   for  the  care  of  the  growing 


242      ECONOMICS  AND  THE  COMMUNITY 

fruit  and  for  its  harvesting  through  cooperative  ownership 
of  equipment. 

II.  An  increased  interest  in  the  industry  among  those 
engaged  through  the  influence  of  common  action  among 
tliem. 


Z''^''-^':'i^r 


©V.  A  V. 

Packing  canteloupes  on  a  melon  ranch  in  the  famous  Imperial 
Valley,  in  Southern  California 

Other  im]Jortant  examples  of  cooperative  distribution 
are  found  among  the  grain-growers  and  dairymen  of  the 
nfjrthwestern  states,  notaljly  Wisconsin  and  Minnesota, 
Cooperative  grain-elevators  and  warehouses  and  coopera- 
tive selling  of  the  products  of  cheese  and  butter  factories 
are  numbered  by  the  thousands. 

Cooperative  work  by  dairymen  has  been  especially  ef- 


COOPERATION  243 

fective  in  securing  greater  returns  to  the  producer  of 
dairy  products  and  in  advancing  scientific  practices  among 
dairymen.  Not  only  is  i)r()visioii  made  in  cooperative 
societies  for  the  manufacture  of  dairy  products,  hut  also 
for  their  marketing  and  for  the  utilization  of  surplus 
products  to  the  hest  advantage.  Improved  dairies  and 
dairying  methods  have  resulted.  In  one  large  association 
the  production  of  cheese  per  hundred  pounds  of  milk  has 
steadily  increased  during  ten  years  of  cooperation  on 
account  of  the  spread  of  scientific  knowledge  of  dairy- 
ing. 

Consumers'  Cooperation 

Consumers'  cooperation  is  the  system  by  which  con- 
sumers combine  to  purchase  goods  for  their  use  directly 
from  wholesalers  or  producers.  A  group  of  farmers 
may  combine  to  purchase  seed,  fertilizer,  food-stufifs,  and 
farm  machinery.  A  group  of  workmen  in  a  factory  may 
combine  to  purchase  food  and  clothing.  Large  numbers 
of  people  may  combine  to  operate  a  store  where  goods 
may  be  purchased  at  cost,  or  where  the  profits  may  be 
divided  among  the  purchasers.  The  plan  usually  followed 
is  to  require  the  purchase  of  at  least  one  share  of  stock 
by  each  mcniljer,  and  to  divide  the  profits  among  the 
members  in  proportion  to  their  purchases. 

The  object  of  consumers'  cooperation  is  to  make  as 
direct  a  contact  lx?tween  producers  and  consumers  as 
possible.  The  advantages  of  such  cooperation  are 
achieved  when  unnecessary  middlemen  are  eliminated,  and 
when  by  good  management  the  wastes  of  competition  are 
lessened. 


244      ECONOMICS  AND  THE  COMMUNITY 
Other  Codperatwe  Plans 

The  cooperative  idea  has  been  worked  out  extensively 
and  successfully  in  the  insurance  field.  Cooperative  or 
mutual  tiro  insurance  companies  are  found  almost  every- 
where among  farmers.  There  are  also  numerous  ex- 
amples of  mutual  or  cooperative  insurance  among  millers, 
drug-store  owners,  hardware  dealers,  and  other  business 
men.  Life  insurance  has  also  been  developed  on  a  large 
scale  through  mutual  companies  and  fraternal  orders. 
Sickness  and  accident  insurance  has  also  become  wide- 
spread through  fraternal  orders,  mutual  benefit  societies 
in  industries,  and  similar  organizations. 

Cooperation  has  found  favor  in  the  financial  field. 
Cooperative  banks  have  been  organized ;  cooperative  build- 
ing and  loan  associations  have  flourished  everywhere,  and 
cooperative  farm  loan  associations  are  gaining  in  favor 
under  the  stimulus  of  the  Federal  Farm  Loan  Act.  These 
organizations  have  many  of  the  characteristics  of  com- 
mercial undertakings,  but  the  spirit  and  results  are  in  most 
cases  cooperative. 

Complete  Cooperative  Organization 
Thus  far  we  have  considered  the  producer,  the  dis- 
tributor, and  the  consumer  separately.  There  still  remains 
the  question  of  the  cooperation  of  the  consumers  to  the 
extent  of  actually  producing  and  distributing  certain  of 
the  goods  that  they  need.  Business  enterprises  conducted 
for  profit  sometimes  go  into  the  business  of  producing 
some  of  the  goods  that  they  use.  Canning  concerns  in 
some  instances  grow  the  products  to  be  canned,  and  manu- 
facture their  cans.     The  pai)er-mill  company  may  produce 


COOPF.  RATION  245 

its  own  wood  for  pulp.  The  steel  company  may  have 
and  operate  its  own  iron-  and  coal-mines.  Rubl^er  manu- 
facturers may  own  their  own  rul)ber  plantations.  Indus- 
tries may  have  their  own  railroads,  pipe  lines,  and  other 
carriers.  Cooperative  enterprises  apply  the  same  practice 
in  producing  goods  for  their  members.  For  instance,  a 
body  of  consumers  having  need  for  thousands  of  pairs 
of  shoes  might  own  and  operate  their  own  shoe  factory; 
or,  having  need  for  milk  and  milk  products,  might  operate 
their  own  cooperative  dairy.  Only  slight  attempts  have 
been  made  in  this  form  of  cooperation  in  this  country. 

The  Rochdale  Pioneers  in  linyland 

The  Rochdale  cooperative  system  was  organized  in 
1842  by  twelve  men — the  Rochdale  Pioneers — who  agreed 
to  pay  twenty  pence  a  week  into  a  common  fund  to  make 
purchases  cooperatively.  Their  first  purchases  were  tea 
and  sugar,  which  they  bought  at  wholesale  and  sold  to 
their  members  at  a  little  more  than  cost.  At  the  end  of 
a  year  they  had  twenty-eight  members,  and  they  started 
a  small  store  with  a  small  stock  of  flour.  The  society 
grew,  and  by  1876  it  had  8892  members  and  £251,000 
in  funds,  and  did  a  business  of  £305,000  a  year. 

The  conditions  of  membership  require  the  payment  of 
a  small  sum,  and  regular  payments  afterward  until  a 
minimum  share  at  least  is  paid  for.  A  member  is  per- 
mitted to  allow  his  shares  to  accumulate  to  £100.  Any 
member  may  withdraw  by  giving  due  notice  of  his  inten- 
tion. The  society  pays  back  all  but  the  amount  of  the 
minimum  share,  and  the  share  may  be  transferred  to  a 
new  member  with  the  approval  of  the  society.     The  net 


246      ECONOMICS  AND  THE  COMMUNITY 

profits  are  distributed  quarterly.  After  deductions  are 
made  for  interest  and  for  education,  the  balance  is  placed 
to  the  credit  of  the  members  in  proportion  to  the  pur- 
chases that  each  has  made.  The  members  are  not  person- 
ally liable  for  losses  over  and  above  their  respective  shares. 

The  management  is  vested  in  an  executive  committee 
of  twelve  members  elected  annually  by  the  members,  each 
member  having  one  vote. 

The  Rochdale  Pioneers  confined  their  operations  for  a 
few  years  to  the  operation  of  cooperative  stores.  Their 
next  step  was  the  starting  of  some  cotton  looms  in  1855. 
The  venture  proved  successful,  and  part  of  a  factory  was 
rented.  A  mill  was  built  in  i860;  but,  owing  to  the  Civil 
War  in  the  United  States,  which  cut  off  the  supply  of  raw 
cotton,  the  business  was  in  depression  for  a  few  years. 
The  workers  in  the  cotton-mills  received  the  profits,  after 
interest  at  five  per  cent  was  paid  on  the  capital,  in  pro- 
portion to  the  amount  of  wages  earned. 

The  next  step  in  cooperation  in  England  was  the 
organization  of  the  Cooperative  Wholesale  Society.  This 
society  engaged  in  the  w^holesale  business  to  supply  the 
cooperatives  and  other  companies.  The  profits  were 
divided  among  the  cooperators  and  companies  in  propor- 
tion to  their  purchases,  the  cooperators  receiving  full 
dividends  and  other  companies  receiving  half  dividends. 
The  society  began  the  production  of  goods  in  1872  by 
the  purchase  of  a  biscuit  factory.  This  was  followed  by 
the  entrance  of  the  society  into  boot-making,  leather- 
currying,  woolen  manufacture,  ready-made  clothing  manu- 
facturing, yarn-making,  corn-milling,  and  printing. 

The  cooperative  movement  that  began  with  the  Roch- 


COOPERATION  247 

dale  Pioneers  and  expanded  into  wholesaling  and  produc- 
tion has  extended  widely  in  Great  Britain.  In  19 18, 
according  to  the  Cooperative  Union  Report,  there  were 
1364  cooperative  distributive  societies,  with  38,465,532 
meml^ers,  a  total  capital  of  £65,737,980,  annual  sales  of 
£155.157,963,  and  profits  of  £16,495,645.  The  produc- 
tive departments  of  co6i)eratives  produced  goods  to  the 
value  of  about  £14,000,000  annually. 

Conditions  of  Success  of  Cooperation 

The  success  of  cooperative  undertakings  depends  upon 
the  ability  with  which  the  business  is  organized  and  con- 
ducted. There  is  no  magic  about  cooperative  plans  by 
which  they  can  be  successful  under  bad  management. 
The  managers  of  a  cooperative  undertaking  meet  the  same 
problems  as  those  who  are  engaged  in  a  private  business. 
The  managers  of  a  cooperative  store,  for  example,  must 
measure  the  needs  of  their  customers,  the  same  as  a 
manager  of  a  store  conducted  by  private  enterprise.  Bad 
judgment  in  buying  or  misjudging  the  market  will  affect 
a  cooperative  business  just  as  they  will  a  private  business. 

Consumers'  cooperation  is  dependent  for  success  upon 
the  ability  of  the  cooperators  to  eliminate  excessive  middle- 
men. If  they  can  not  buy  directly  from  the  producer 
they  must  purchase  from  the  wholesaler,  and  they  are  in 
exactly  the  same  position  as  a  small  private  business — 
the  advantage  to  the  cooperators  in  such  case  being  merely 
the  elimination  of  the  profits  of  the  storekeeper. 

The  success  of  producers'  and  distributors'  cooperation 
depends  likewise  upon  the  management  being  equal  in 
ability  to  the  management  by  wholesalers  and  jobbers  in 


248      ECONO^IICS  AND  THE  COAIMUNITY 

private  enterprises.  Unless  they  deal  directly  with  con- 
sumers they  are  also  confronted  with  the  same  problems 
of  organizing  the  market  for  the  sale  of  goods  as  the 
wholesalers  and  jobbers.  They  may  secure  for  their 
members  the  profits  of  the  wholesaler  or  jobber  if  the 
business  is  managed  successfully  enough  to  secure  profits, 
but  successful  co()peration  requires  more  than  that.  The 
real  purpose  of  cooperation  should  Ije  to  secure  as  direct 
dealings  as  possible  between  producer  and  consumer.  The 
test  of  cooperation  should  be  the  extent  to  which  excessive 
middlemen  are  eliminated  and  the  producers  and  con- 
sumers are  brought  together.  The  numerous  successful 
examples  of  cooperative  undertakings  and  the  rapidity 
with  which  cooperative  organizations  are  spreading  over 
this  country  indicate  that  they  are  found  to  be  practicable 
ways  of  accomplishing  the  primary  purpose  of  bringing 
the  producer  and  the  consumer  together. 

Questions  and  Problems 

1.  What   are   the  essentials    for   success   of   cooperative 

business? 

2.  What   difficulties   does   a   retail   cooperative   store   en- 

counter ? 

3.  Why  is  it  necessary  sometimes  for  cooperative  organ- 

izations among  consumers  to  extend  their  operations 
to  the  wholesale  business,  and  even  to  production  ? 

4.  Does  coojieration  remove  all  need  for  middlemen? 

5.  Why  is  it  necessary  for  consumers'  cofiperative  organ- 

izations to  organize  their  market  comj)letely? 

6.  What  advantages  are  there  in  local  consumers'  clubs 

for  the  i)urchase  of  certain  articles? 

7.  W'by  is  cor'iperation  especially  important  to  the  farmer? 

8.  What  are  the  forms  of  cooperation  most  useful  to  the 

farmer? 


COOPERATION  249 

9.  Should  cooperative  stores  attempt  to  carry  all  kinds  of 
goods,  or  merely  those  that  enter  most  largely  into 
the  cost  of  living  ? 

10.  Study  in  the  references  tlie  history  of  cooperation  in 

this  country  and  h'.uropean  countries. 

11.  What  examples  of  cooperative  insurance  and  banking 

are  found  in  your  community  ? 

12.  Study  the  plans  of  mutual  or  cooperative  fire  insurance 

companies  doing  business   in   your  locality.     Other 
forms  of  banking  or  financial  cooperation. 

References 

Coulter,  Cooperation  Among  Fanners. 

Powell,  Cooperation  in  Agriculture. 

Harris,  Cooperation  the  Hope  of  the  Consumer. 


CHAPTER  XVI 

AGRICULTURAL    PROBLEMS 
Coiiiuiuuify  Survey 

1.  If  your  community  is  a  rural  one,  make  a  study  of 

ownership  or  tenancy. 

2.  What  is  the  character  of  farm  i)roduction? 

3.  Explain  the  process  by  which  the  products  reach  the 

market. 

4.  Explain    the    process    by    which    farm    production    is 

financed. 

5.  Secure  copies  of  the  Federal  Farm  Loan  Act  and  study 

its  provisions. 

Agriculture  is  the  basic  industry  of  this  country.  The 
products  of  the  soil  are  the  most  essential  of  all  products. 
They  furnish  the  raw  materials  for  food,  clothing  and 
shelter,  the  primary  needs  of  everyone.  The  value  of 
farm  products  in  the  United  States  exceeded  $24,000,- 
000,000  in  19 19.  The  value  of  manufactured  products 
in  the  year  19 14  amounted  to  $24,000,000,000,  of  which 
less  than  ten  billions  was  added  by  manufacture  to  four- 
teen billions  of  raw  material.  In  the  same  year  the  value 
of  farm  produce  was  nearly  ten  billion  dollars.  These 
comparative  facts,  together  with  the  close  relationship  of 
agricultural  production  to  the  welfare  of  all  the  people, 
make  the  special  study  of  agriculturaJ  problems  im- 
portant. 

250 


AGRICULTURAL  PROBLEMS  251 

Decrease  of  .lyric idtiiral  Workers 
The  percentage  of  the  people  of  the  United  States 
engaged  in  agriculture  has  been  decreasing  for  many 
years,  as  shown  by  the  Federal  Census.  In  1880  those 
engaged  in  agriculture  numbered  44.1  per  cent  of  the 
total  population;  in  1890  the  percentage  had  been  reduced 
to  37.2  per  cent;  in  1900  to  35.2  per  cent;  and  in  1910 
to  32.5  per  cent.     This  reduction  in  the  proportion  of 


persons  engaged  in  agriculture  means  that  those  who 
continue  as  agricultural  workers  must  produce  more,  if 
the  supply  of  necessaries  of  life  is  to  remain  constant. 
Men  who  think  about  public  problems  have  been 
alarmed  at  this  state  of  affairs,  and  have  predicted  calam- 
ities if  the  farmers  are  continually  drawn  from  the  country 
to  the  city.  The  fear  that  the  situation  will  continue  until 
our  farms  do  not  produce  enough  to  feed  the  country  has 
caused  careful  thought  to  be  given  to  methods  of  improv- 
ing agricultural  conditions. 


252       ECONOMICS  AND  THE  COMMUNITY 

A  great  deal  of  the  alarm  is  without  foundation.  The 
reduction  of  the  percentage  of  people  engaged  in  agri- 
culture is  partly  due  to  increased  efficiency  on  the  farm. 
While  the  percentage  of  farmers  has  been  decreasing  the 
production  of  each  farmer  has  been  increasing.  Farm 
machinery  has  revolutionized  farm  production.  One  man 
with  a  tractor  may  plow  as  much  as  several  men  with 
teams.  The  self-binder  does  the  work  of  a  score  of  men 
with  the  old-fashioned  cradle.  The  grain-drill,  mower, 
horse-rake,  hay-loader,  wheel-cultivator,  windmill,  gaso- 
line-engine, milking-machine,  cream-separator,  and  other 
machinery  have  made  it  possible  for  one  man  to  produce 
as  much  as  two  or  three  could  have  done  twenty-five  years 
ago.  Science  and  invention  have  brought  this  change 
about,  and  will  doubtless  continue  to  promote  similar 
improvements  in  the  future.  The  need  for  machinery 
has,  however,  created  problems  of  increased  farm  finance 
which  we  shall  discuss  later  in  this  chapter. 

Decrease  in  Production 

While  the  decrease  in  numljer  of  farmers  is  offset 
largely  by  improved  machinery,  there  has  not  been  a 
corresponding  improvement  in  production  per  acre  for 
the  country  as  a  whole.  The  average  yield  of  most  of 
our  crops  is  far  below  what  it  should  be.  We  have  been 
producing  only  about  fifteen  bushels  of  wheat,  thirty 
bushels  of  corn,  and  one  hundred  bushels  of  potatoes  per 
acre.  This  is  far  below  the  results  obtained  from 
the  soils  of  European  countries,  and  also  from  the 
more  intelligently  cultivated  soils  of  our  own  coun- 
try. 


AGRICULTURAL  PROBLRMS  253 

We  have  plenty  of  evidence  that  we  have  l^een  destroy- 
ing our  soil  by  destructive  tillage.  We  have  been  ex- 
tracting the  soil  elements  and  have  not  been  replacing 
them.  The  one-crop  system — that  is,  the  system  of  plant- 
ing the  same  crop  year  after  year — has  prevailed  to  a 
considerable  extent  in  some  parts  of  the  country.  Soil 
exhaustion  follows  such  a  practice  unless  scientific  fer- 
tilization is  used.  In  the  early  days,  as  fast  as  soils  were 
exhausted  new  soils  were  brought  into  use,  and  the  old 
fields  were  left   fallow   for  a  time  or  were  abandoned. 

Deserted  fields  and  farms  can  be  found  in  many  parts 
of  the  country.  Many  such  farms  are  practically  value- 
less, while  some  may  be  restored  by  scientific  care.  The 
problem  of  soil  exhaustion  becomes  a  serious  one  in  these 
times,  when  there  are  no  new  fertile  lands  to  develop, 
except  at  large  expense. 

Farm  Ownership 

In  1 910,  63  per  cent  of  the  farms  in  this  country 
were  operated  by  the  owner,  and  t,/  per  cent  by  tenants. 
The  percentage  of  farms  operated  by  owners  has  been 
decreasing  for  a  number  of  years.  In  1880  it  was  74.5 
per  cent;  in  1890,  71.6  per  cent,  and  in  1900,  64.7  per 
cent.  This  is  natural  when  we  consider  the  increased 
investment  that  is  necessary  in  nearly  all  parts  of  the 
country  to  own  and  operate  a  farm. 

There  are  two  forms  of  tenantry — the  cash  system  and 
the  share  system.  In  the  cash  system  the  tenant  pays  a 
cash  rental  for  the  use  of  the  farm  and  sometimes  for 
the  farm  equipment.  In  the  share  system  the  owner 
and  the  tenant  divide  the  product  on  some  prearranged 


254      ECONOMICS  AND  THE  COMMUNITY 


OWNERS 

PERCENTAGE  OF  FARMERS  IN  EACH  AGE  GROUP 


1910.  1900  AND  I890 
1910  ISSSSSS)    t900 


D    1890 


Farm  ownership  in  U,   S. 


AGRICULTURAL  PROBLEMS  255 

basis.     In  either  system  the  tenant  may  provide  a  part 
or  all  of  the  equijjment. 

The  tenant  system  has  a  tendency  to  promote  soil 
exhaustion.  The  tenant  is  interested  only  in  the  imme- 
diate crop,  because  he  will  probably  move  to  another 
farm  in  a  few  years.  He  has  no  direct  interest  in  keeping 
nj)  the  productivity  of  a  farm  Ijelonging  to  someone  else. 
Neither  has  he  a  direct  interest  in  the  upkeep  of  the 
buildings  and  equipment  belonging  to  the  owner.  While 
there  are  many  examples  of  tenants  who  take  the  same 
interest  in  improved  agriculture  as  the  owners  themselves, 
this  is  not  usually  the  case.  Those  who  have  the  best 
interests  of  agriculture  at  heart  have  looked  with  concern 
upon  the  growth  of  permanent  tenantry.  In  so  far  as 
it  represents  a  stage  of  growth  from  farm-lal:)orer  to 
farm-owner,  tenantry  is  a  healthy  sign ;  otherwise  it  is  not. 

Agricultural  Finance 

The  increase  of  equipment  necessary  to  carry  on  agri- 
cultural production,  and  the  increase  in  the  cost  of  land, 
have  brought  to  the  front  the  problem  of  providing  means 
for  the  farmers  to  finance  the  purchase  of  farms  and  the 
production  of  crops. 

Not  many  years  ago  a  man  ambitious  to  be  a  farmer 
could  secure  fertile  lands  free  or  at  small  cost.  A  small 
investment  in  farm  tools,  horses,  and  live-stock  sufficed 
to  make  a  beginning.  To-day  the  purchase  of  a  farm  in 
nearly  all  sections  of  the  country  involves  the  investment 
of  large  sums  of  money.  The  necessity  for  modern  farm 
equipment  requires  another  large  investment.  It  is 
growing   more   and    more   difficult    for   the   young   man 


256       ECONOMICS  AND  THE  COMMUNITY 

ambitious  to  be  a  farmer  to  acquire  the  initial  capital 
needed  to  purchase  land  and  equipment. 

Agriculture  has  also  become  a  business,  and  must  de- 
pend, like  any  other  business,  upon  financial  credit.  In 
fact  it  must  depend  even  more  than  many  lines  of  business 
upon  financial  credit  because  of  its  nature.  A  long  period 
must  elapse  between  the  sowing  of  the  seed,  the  reaping 
of  the  harvest,  and  the  selling  of  the  product. 

The  farmer  without  adequate  finance  or  storage  facili- 
ties is  compelled  to  sell  as  soon  as  possible  after  harvesting 
his  crop.  Many  farmers  place  their  products  on  the 
market  immediately,  for  whatever  they  will  bring.  This 
results  in  a  glutting  of  the  market  immediately  following 
the  harvest,  and  a  reduction  of  price.  The  process  works 
for  the  benefit  of  middlemen  and  speculators,  who  take 
advantage  of  the  farmers"  needs  for  the  immediate  sale 
of  his  products. 

Farm  Loans  and  Credit 
To  meet  the  financial  need  of  the  farmers,  two  systems 
of  financial  backing  are  at  present  being  provided  by 
public  and  private  enterprise.  The  first  makes  provision 
for  the  lending  of  money  for  the  purchase  or  improvement 
of  land.  The  second  makes  provision  for  the  financing 
of  production,  the  storage  of  products,  and  the  financing 
of  the  handling  of  the  products  until  sold. 

The  Farm  Loan  Act 

After  many  years  of  study  and  agitation  the  Federal 

Farm  Loan  Act  was  passed  in  1916.     The  purpose  of  this 

act,  as  stated  in  the  title  of  the  act,  is  "to  provide  capital 

for  agricultural  development,  to  create  standard  forms  of 


AGRICULTURAL  PROBLKMS 


257 


investment  based  upon  farm  mortgage,  to  equalize  rates 
of  interest  on  farm  loans,  etc." 

The  act  created  the  Federal  Farm  Loan  Board,  con- 
sisting of  five  memljers,  four  to  be  appointed  by  the 
President  and  the  fifth  the  Secretary  of  the  Treasury, 
who  is  the  chairman  of  the  board.  The  board  was 
directed  to  divide  the  country  into  twelve  districts,  "with 
due  regard  to  the  farm-loan  needs  of  the  country,"  and 
to  establish  a  federal  land  bank  in  each  district.  Follow- 
ing out  this  direction,  the  board  established  districts  with 
locations  of  farm-land  banks  as  follows : 


Location 
Springfield,  Mass. 

Baltimore,  Md. 

Columbia,  S.  C. 

Louisville,  Ky. 

Xew  Orleans.  La. 

St.  Louis,  Mo. 
St.  Paul,  Minn. 

Omaha,  Xeb. 

Wichita.  Kan. 

Houston.  Tex. 
Berkeley,  Cal. 

Spokane,  Wash. 


District 

New  England,  Xew  York, 
and  X'^ew  Jersey. 

Pennsylvania.  West  Mrginia. 
Maryland,  Virginia.  Dela- 
ware, and  District  of  Co- 
lumbia. 

North  Carolina,  South  Caro- 
lina. Georgia,  Florida. 

Indiana.  Ohio,  Kentucky. 
Tennessee. 

Louisiana,  Mississippi,  Ala- 
bama. 

Illinois.  Missouri.  Arkansas. 

North  Dakota.  Minnesota, 
Wisconsin,   Michigan. 

Wyoming,  Xebraska,  South 
Dakota,  Iowa. 

New  Mexico.  Colorado,  Kan- 
sas, Oklahoma. 

Texas. 

California,  Xevada,  L'tah. 
Arizona. 

Idaho,  Washington,  Mon- 
tana. Oregon. 


2sS       ECONOMICS  AND  THE  COMMUNITY 

The  act  provides  for  the  creation  of  farm-loan  asso- 
ciations consisting  of  persons  who  desire  to  borrow  money 
on  farm-mortgage  security.  These  associations  are 
nuitually  managed  by  the  members.  Loans  are  made  by 
the  land  banks  through  these  associations. 

Loans  may  be  made  for  the  following  purposes : 


Farm  loan  districts 


(a)  To  provide  for  the  purchase  of  land  for  agricultural 

uses. 

(b)  To  provide  for  the  purchase  of  equipment,  fertilizers, 

and  live-stock  necessary  for  the  proper  and  reasonable 
operation  of  the  mortgaged  farm. 

(c)  To  provide  buildings  and  for  the  improvement  of  farm- 

lands. 

(d)  To  liquidate   indebtedness  of  the   owner  of   the  land 

mortgaged. 


The  loans  must  not  exceed  one  half  the  value  of  the 
land ;  must  be  jjayable  in  instalments  running  for  not  less 
than  five  years  nor  more  than  forty  years ;  and  must  be 


AGRICULTURAL  PROBLKMS  259 

made  only  to  persons  who  are  actually  eni^aged,  or  about 
to  be  engaged,  in  the  cultivation  of  the  soil. 

This  act  makes  available  in  all  parts  of  the  country 
ample  money  for  loans  on  farm  mortgages.  It  does  not 
provide  for  short-time  loans  to  finance  the  operation  of 
farms.  It  does,  however,  provide  that  the  lx)ard  may 
disseminate  information  for  the  instruction  oi  farmers 
"regarding  the  methods  and  principles  of  cooperative 
credit  and  organization." 

In  1919  there  were  3890  farm-loan  associations,  having 
an  average  of  27.5  members  for  each  association.  The 
total  number  of  loans  made  under  the  act  to  November, 
1920,  was  106,929,  and  the  total  amount  lent  amounted 
to  $282,007,781. 

Some  of  the  states  have  provided  for  similar  assistance 
by  state  laws.  Private  agencies,  banks,  and  building  and 
loan  associations  have  been  rapidly  extending  their  opera- 
tions to  the  financing  of  farm  undertakings. 

Short-Tiuic  Loans 

The  financing  of  production  and  distribution  of  farm 
products  has  thus  far  been  left  largely  to  private  agencies, 
although  some  of  the  states  have  made  a  beginning  in 
such  work.  Formerly  the  farmers  in  some  communities 
were  compelled  to  pay  exorbitant  rates  of  interest  to 
secure  any  money  at  all.  Those  conditions  have  changed 
radically,  and  banks  have  begun  to  lend  more  freely  to 
provide  for  farmers'  needs.  Associations  have  been 
formed  to  provide  finance  and  storage  for  producers. 

One  of  the  most  efficient  methods  of  financing  the 
farmer  is  the  use  of  warehouse  receipts.     The  producer 


26o       ECONOMICS  AND  THE  COMAIUNTTY 

of  wheat  stores  his  wheat  in  elevators  or  warehouses  and 
secures  warehouse  receipts  for  the  amount  and  grade 
stored.     These  receipts  are  taken  at  banks  as  security  for 


Bad  road 

loans.  The  farmer  may  thus  hold  his  grain  in  the  ware- 
house and  yet  secure  money  to  meet  his  needs.  A  wider 
extension  of  this  method  of  financing  is  to  be  desired. 
It  is  merely  the  extension  of  banking  facilities  to  the 
producers  of  farm  products  that  have  long  been  extended 
under  similar  conditions  to  manufacturing  industries. 

Cooperation  among  Farmers 

We  have  discussed  in  another  chapter  the  subject  of 
cooperation  among  producers,  distributors,  and  consumers. 
Probably  to  no  class  is  co^jperation  of  as  much  significance 
as  to  the  farmer.  It  is  likewise  most  difficult  among 
farmers,   because  of  their   isolation.     Indications  point, 


AGRICULTURAL  TROBLLMS 


261 


however,  to  the  success  and  ra])i(l  extension  of  some  forms 
of  cooperation,  especially  in  tiic  sale  of  farm  products 
and  the  purchase  of  farm  necessities. 

Rural  Transportation 

The  farmer  is  particularly  dependent  upon  transpor- 
tation. Almost  everything  he  produces  must  be  trans- 
l)orted  over  the  highways  and  the  railroads,  rivers,  canals, 
or  ocean.  The  goods  he  uses  must  run  the  whole  extent 
of  transportation  facilities.  It  is  not  to  be  wondered  at 
that  the  great  movements  for  the  extension  of  transpor- 
tation and  the  regulation  of  railways  and  other  means  of 
transjwrt  originated  among  the  farmers. 


Same  road  after  improvement 

Improved  highways  have  a  direct  influence  upon  almost 
•every  farm  condition.  Bad  roads  isolated  the  farmer. 
They  compelled  the  immediate  moving  of  products  before 


262      ECONOMICS  AND  THE  COMMUNITY 

the  roads  became  impassable  in  the  fall  and  winter,  and 
added  considerably  to  the  cost  of  marketing  crops.  Bad 
roads  prevented  adequate  medical  attention,  proper  school- 
ing, and  community  cooperation.  Far-sighted  farmers 
have  supported  every  move  for  improved  roads  for  eco- 
nomic as  well  as  for  social  reasons.  We  have  reason  to 
exi)ect  that  good  roads  and  the  use  of  automobiles  and 
motor-trucks  will  correct  many  of  the  evil  conditions  in 
rural  communities  in  the  production  and  distribution  of 
goods,  and  in  the  supplying  of  rural  community  needs. 

Questions  and  Problems 

Explain  fully  why  special  attention  should  be  paid  to 
farm  production. 

What  are  the  causes  of  farmers  leaving  the  farm  for 
the  city  ? 

Is  there  any  indication  in  your  community  of  city  resi- 
dents leaving  the  city  for  the  farm? 

How  do  the  economic  conditions  of  the  farmer  com- 
pare with  those  in  the  city  ? 

What  is  the  effect  of  unimproved  roads  and  means  of 
rural  transportation  upon  farm  conditions? 

Talk  to  some  person  who  has  had  experience  with  the 
Farm  Loan  Act  and  learn  of  its  detailed  working. 

7.  What  forms  of  agricultural  cooperation  are  found  in 

your  community?     I'^xplain  some  plans  in  detail. 

8.  What  are   the   advantages   and   disadvantages   of  ten- 

antry?    What  is  the  usual  form  of  tenantry  in  your 
community? 

9.  Secure  copies  of  sample  warehouse  receipts  and  study 

their  provisions. 

References 

Fetter,  Economics,  Volume  2,  Chapters  26  and  2y. 

Galpin,  Rural  Life. 

Huebner,  Agricultural  Commerce. 


AGRICULTURAL  PROBLEMS  263 

Carver,  Principles  of  Rural  Economics. 
United  States  Department  of  Agriculture,  Year  Book  and 
Report  of  Secretary. 

United  States  Farm  Loan  P.oard,  .inmial  Report. 
Taylor,  Agricultural  Economics. 


CHAPTER  XVII 

THE   ECONOMIC    PROBLEMS    OF    CITIES 
Coininiiiiity  Survey 

1.  Make  a  study  of  the  growth  of  your  city  in  population 

and  area. 

2.  Make  a  map  of  the  street  plan,  showing  railroads  and 

terminals,  belt  lines  and  warehouses. 

3.  What  are  the   principal   means   of   transportation   for 

workers  ? 

4.  Describe  the  workings  of  the  city  market,  if  any. 

5.  Are  the  roads  leading  into  the  country  improved? 

The  growth  of  cities  is  an  economic  factor  of  prime 
importance.  For  many  decades  the  census  figures  of  the 
United  States  have  shown  an  increasing  percentage  of 
people  living  in  cities.  In  1870,  20.9  per  cent  of  the 
people  lived  in  cities  of  more  than  8000;  in  1880,  22.6 
per  cent;  in  1890,  29.2  per  cent;  in  1900,  33.1  per  cent, 
in  1910,  38.8  per  cent.  In  the  latter  year  46.4  per  cent 
lived  in  cities  and  villages  of  more  than  2500  population. 
The  census  of  1920  showed  a  majority  of  the  people 
living  in  such  cities  and  villages.  Why  is  this  growth 
taking  place,  and  what  are  the  economic  problems  result- 
ing?    These  questions  are  the  subject  of  this  chapter. 

Causes  of  City  Growth 

Cities  were  originally  built  for  protection.  They  were 
the  centers   to   which   people   retired   when   menaced   by 

264 


THE  ECONOMIC  PROBLEMS  OF  CITIES    265 

enemies.  The  builders  of  such  cities  sought  places  that 
could  be  easily  defended.  The  cities  were  not  commercial 
in  the  modern  sense,  but  some  of  those  that  were  well 
placed  have  developed  into  industrial  and  commercial 
centers.  We  have  had  no  such  cities  in  the  United  States. 
The  growth  of  the  modern  American  city  has  been  due 

Per  Cent  of  Tot.m.  Popl'i.ation  in  Cities  Having  a 
Population  of  Over  30,000  and  Per  Cent  Outside  Such 
Cities  for  Specified  Years:  1790-1919. 

PER  CENT 
O  20  40  60  80  100 


1790 


p^^QPER  CENT  IN  CITIES  WITH  30,000   OR    MORE   POPULATION 
^^^^PER  CENT  OUTSIDE  SUCH  CITIES 

The  growth  of  city  populations 

in  large  part  to  the  factory  system  and  to  the  improvement 
of  transportation.  Many  industries  are  more  profitably 
conducted  in  large  units.  Consequently  the  factory  with 
power-driven  machinery  has  replaced  the  small  shop. 
The  concentration  of  industry  under  the  factory  roof  has 
also  caused  the  concentration  of  population  around  the 


266      ECONOMICS  AND  THE  COMMUNITY 

factory.  Increased  transportation  facilities  have  made 
the  city  the  market  tor  wider  areas.  The  trade  of  cities 
is  extended  into  more  distant  areas  as  transportation 
improves. 

The  first  cities  in  this  country  were  water  ports.  They 
were  built  along  the  bays,  inlets,  and  navigable  rivers, 
and  were  principally  the  outlets  for  goods  that  were 
brought  by  river  and  trail  from  the  inland.  New  York, 
Boston,  Philadelphia,  Charleston,  and  Savannah  were 
among  the  earliest  of  these.  Gradually,  as  people  pressed 
into  the  interior,  highways  were  constructed  and  canals 
built  which  served  to  increase  the  volume  of  trade  and 
extend  the  possibilities  of  distribution.  This,  in  turn, 
necessitated  an  increase  in  the  number  of  workers,  and 
also  increased  facilities  for  the  maintenance  of  the 
population.  The  building  of  the  Erie  Canal  caused  the 
development  of  a  numljer  of  commercial  centers  in  New 
York  state.  Even  yet  the  most  important  locations  for 
cities  are  on  navigable  waters. 

When  railroads  developed  it  was  possible  to  have  other 
industrial  and  commercial  centers  than  those  located  on 
navigable  waters.  The  railroad  tapped  new  areas,  thus 
permitting  industrial  and  commercial  development  in 
heretofore  inaccessible  places.  Those  cities  that  were 
located  on  navigable  water  and  that  were  also  the  ter- 
minals of  railways  developed  most  rapidly.  The  building 
of  interurban  railroads  brought  further  develo])ment  for 
inland  cities,  and  promoted  still  wider  extensions  of  trade 
from  the  central  trading  cities. 

The  supply  of  laljor  and  capital  has  been  an  important 
element  in  promoting  city  growth.     Industries  seek  loca- 


THE  ECONOMIC  PROBLEMS  OF  CITIES    267 

tions  where  there  is  the  best  prospect  of  obtaining  labor 
while  those  requiring  special  kinds  of  skill  must  generally 
locate  where  that  skill  is  to  be  fcjund. 

The  capital  necessary  to  conduct  industries  is,  as  a  rule, 
to  be  found  in  cities.  Those  cities  that  have  the  largest 
amounts  of  capital  available  for  investment  make  strong 
appeals  for  the  location  of  new  industries,  which  in  turn 
bring  more  i)eo])le. 

Many  cities  and  towns  have  developed  as  trading  cen- 
ters, particularly  in  agricultural  areas.  Such  cities  supply 
the  needs  of  the  surrounding  country  and  serve  as  the 
outlet  and  shipping  centers  for  agricultural  products. 
The  trading  cities  that  are  most  favorably  located  become 
distributing  centers  for  many  of  the  smaller  cities,  serving 
as  the  outlet  and  inlet  of  goods  for  wider  areas. 

Power  has  been  another  cause  for  the  growth  of  cities. 
In  earlier  times  cities  grew  up  around  waterfalls  where 
cheap  power  was  available.  Several  cities  in  New  York 
and  New  England  owe  their  start  to  the  presence  of 
abundant  water-power. 

Other  cities,  such  as  Pittsburgh,  Pennsylvania,  owe 
their  growth  to  coal  as  a  source  of  steam-power.  In  more 
recent  times  electric  power,  generated  from  water-power, 
has  made  possible  the  growth  of  cities  within  range  of 
transmission  of  electric  current  generated  from  water- 
power.  The  cities  around  the  Falls  of  Niagara  demon- 
strate this  fact. 

Special  industries  have  caused  certain  cities  to  grow. 
Rubber  plants  located  at  Akron,  Ohio,  in  the  infancy  of 
the  rubber  industry,  grew  to  large  proportions  with  the 
growth  of  that  industry,  and  brought  about  the  develop- 


268      ECONOMICS  AND  THE  COMMUNITY 

inent  of  a  large  industrial  city.  The  electrical  industry 
developed  Schenectady,  the  shoe  industry  Brockton,  the 
cash  register  industry  Dayton,  the  automobile  industry 
Detroit.     Many  similar  examples  could  be  named. 

Cities  have  also  been  established  at  points  where  raw 
materials  such  as  iron  ore  and  other  products,  such  as 
coal,  are  conveniently  brought  together.  The  cities  of 
Gary,  Cleveland,  Youngstown,  Canton,  and  other  indus- 
trial centers  in  Ohio,  Indiana  and  Pennsylvania  are  ex- 
amples. Coal  from  the  mines  of  Indiana  is  transported 
to  (iary  to  smelt  the  iron  ore  brought  by  boat  from 
northern  Michigan,  Coal  from  Ohio,  Kentucky  and 
West  Virginia  meets  the  iron  ore  of  Michigan  at  the 
industrial  centers  of  Ohio  and  Pennsylvania,  while  in 
some  places  in  Pennsylvania,  and  notably  in  Birmingham, 
Alabama,  coal  and  iron  are   found  in  the  same  area. 

Immigration  is  another  source  of  the  growth  of  cities. 
Immigrants  from  Europe  have  remained  largely  in  the 
cities  of  this  country  because  of  their  own  inertia  and  the 
lack  of  facilities  to  get  to  the  farm-lands.  Once  in  the 
city  the  immigrant  has  had  a  tendency  to  remain  there, 
thus  making  a  further  bid  Ijy  his  labor  for  the  location 
of  still  more  industries  in  the  city. 

Some  other  causes  for  growth  of  cities  may  be  men- 
tioned such  as  the  location  of  seats  of  government,  state 
and  national.  Washington  is  the  best  example  of  this. 
It  has  remained  primarily  a  city  of  government  employees. 
Many  state  capitals  obtained  their  start  as  cities  merely 
because  they  were  state  capitals.  A  few  are  still  political 
rather  than  industrial  or  commercial  centers. 

Other  special  reasons  could  be  given  for  the  location 


THE  ECONOMIC  PROBLEMS  OF  CITIES    269 

and  growth  of  many  cities,  but  some  one  or  more  of  the 
causes  set  forth  above  has  determined  the  location  and 
growth  of  most  of  our  cities. 

Lack  of  Planning 

Practically  all  of  the  cities  of  the  United  States  have 
expanded  from  small  to  large  size  without  a  plan.  A  few, 
like  Washington,  were  laid  out  in  advance ;  but  the 
majority  have  had  an  unregulated  and  unplanned  growth. 
Many  cities  are  overgrown  towns,  with  narrow  streets  and 
alleys,  and  without  traffic  thoroughfares.  Consequently 
they  are  congested.  This  has  resulted  because  the  streets, 
alleys,  and  thoroughfares  were  laid  out  to  accommodate 
the  traffic  of  the  small  city  or  town  before  the  era  of  the 
automobile.  The  large  city,  swarming  with  motor- 
vehicles,  is  compelled  to  accommodate  itself  to  the  traffic 
facilities  of  the  small  community. 

Planning  for  such  cities  consists  in  the  expensive  re- 
building of  streets  and  development  of  other  means  of 
transport.  City  planning  for  the  future  city  involves 
the  laying  out  in  advance  of  all  of  the  facilities  that  may 
be  necessary  to  accommodate  the  people,  business,  and 
industries  of  the  city  for  all  time.  Cities  are  delinquent 
in  their  duty  if  they  do  not  make  provision  for  future 
growth  by  promoting  efficient  means  of  transportation 
and  providing  for  the  health  and  welfare  of  their  people. 

Problems  of  Transportation 

The  transportation  of  passengers  and  freight  within 
a  city,  and  into  and  out  of  a  city,  is  the  major  economic 
problem  in  city  planning.     This  problem  would  have  been 


270      ECONOMICS  AND  THE  CO^IMUNITY 

comparatively  simple  if  means  of  transportation  had  been 
planned  adequately  in  advance.  As  it  is,  the  problem 
will  be  a  growing  one  in  most  of  our  cities  as  population 
and  trade  increase. 

The  transportation  of  passengers  is  the  problem  that 
comes  first  to  mind.  The  inconveniences  of  lack  of  facil- 
ities for  passenger  traffic  are  readily  appreciated.  The 
problem  in  large  cities  is  that  of  providing  adequate  street 
railways  to  enable  people  to  live  in  good  surroundings. 
This  problem  becomes  acute  in  those  cities  where  the 
congestion  of  traffic  on  the  streets  makes  surface  railroads 
slow  and  unsatisfactory.  Such  cities  must  provide  ele- 
vated tracks,  subways,  motor-buses,  and  suburban  rail- 
ways to  meet  the  traffic  needs.  The  congestion  in  down- 
tow'n  Manhattan,  in  the  Chicago  loop,  and  in  parts  of 
Cleveland,  Boston,  Pittsburgh,  and  other  cities  call  for 
increased  facilities. 

Central  terminal  facilities  for  passenger  traffic  on  the 
railroads,  or  easy  transportation  between  terminals,  is 
of  great  importance.  Those  cities  that  have  union  stations 
save  enormous  amounts  of  time  for  railroad  passengers. 
The  waste  of  time  in  transferring  from  station  to  station 
is  necessarily  very  great  in  any  large  city. 

The  building  of  freight  terminals  and  facilities  for 
expediting  shipments  of  goods  is  of  no  lesser  importance. 
The  congestion  of  freight  causes  loss  of  time  and  mate- 
rials, and  directly  increases  the  cost  of  goods  to  the 
consumer.  Some  cities  have  developed  belt  lines  of  rail- 
way connecting  the  terminals  of  the  different  railroads 
entering  the  city  and  the  wharves  with  the  industries. 
When  these   lines  are   sufficiently  developed,   with  spur 


THE  ECONOMIC  PROBLEMS  OF  CITIES   271 

tracks  reaching  all  of  the  leading  industries,  so  that 
freight-cars  coming  in  from  any  direction  may  be  easily 
switched  to  their  destination  or  to  the  wharves  or  tracks 
of  another  railroad,  they  will  prevent  waste  and  promote 
efficiency. 

From  the  economic  standpoint,  the  cities  that  plan  all 
of  their  terminals  for  freight  and  express  will  make  it 
possible  for  their  people  and  industries  to  produce  more 
effectively.  The  economic  loss  in  time  wasted  by  pas- 
sengers or  by  shippers  through  badly  planned  transpor- 
tation and  terminal  systems  is  a  serious  one,  and  cities 
serve  their  own  special  interests  by  studying  and  solving 
the  problem. 

Street  Planning 

Cities  have  generally  been  laid  out  on  the  checkerboard 
plan.  Streets  cross  one  another  at  right  angles.  This 
arrangement  permits  direct  entrance  to  the  center  of  the 
city  from  only  four  points.  For  convenience  in  getting 
goods  into  and  out  of  the  city,  the  ideal  plan  would  provide 
for  diagonal  streets  in  addition,  so  that  the  heart  of  the 
city  might  be  reached  from  all  directions.  Very  few 
have  such  a  plan.  The  older  cities  were  frequently  laid 
out  irregularly,  with  crooked  streets.  Many  of  these 
cities  have  found  it  necessary  to  cut  new  streets  at  im- 
mense cost  to   facilitate  the  carrying  on  of  business. 

Closely  related  to  the  problem  of  the  streets  are  the 
highways  leading  into  the  country.  The  use  of  motor- 
trucks in  supplying  the  urban  needs  has  made  the  connect- 
ing country  roads  of  increasing  importance  to  the  city. 
Impassable  roads  or  roads  that  do  not  connect  with  traffic 


2-J2      ECONOMICS  AND  THE  COMMUNITY 

thoroughfares  in  the  city  cause  waste  of  time  and  increased 
cost  of  transportation.  Cities  that  have  a  true  sense  of 
their  economic  welfare  promote  extensive  plans  to  make 
the  city  accessible  to  all  kinds  of  traffic,  whether  by  high- 
ways, interurban  lines,  railroads,  water,  or  airplane. 

Housing 

The  planning  of  a  city  from  the  economic  as  well  as 
from  the  social  point  of  view  includes  provision  for  proper 
housing  of  all  the  people  who  live  in  the  city.  When 
transportation  facilities  are  inadequate  people  are  com- 
pelled to  crowd  into  the  sections  nearest  their  work. 
Low  wages  often  compel  workers  to  live  under  bad  con- 
ditions near  their  employment.  The  congestion  of  popu- 
lation on  Manhattan  Island  is  due  largely  to  these  causes. 
When  transportation  facilities  are  good  and  the  rates 
reasonable  workers  move  out  farther  and  farther  from 
their  work,  and  their  children  grow  up  in  better  sur- 
roundings. Business  and  community  enterprise  should 
promote  this  result.  Bad  housing  means  increased  sick- 
ness, and  consequent  inefficiency,  which,  in  turn,  hurts 
industry  and  the  community.  Many  industries  have 
found  it  to  their  advantage  to  build  houses  for  their  work- 
men in  favorable  surroundings.  Cities  sometimes  engage 
directly  in  housing  projects.  The  federal  government 
found  it  necessary  to  build  houses  for  the  war  workers 
in  several  industrial  centers  during  the  war.  Such  enter- 
prises pay  in  economic  and  social  welfare. 

City  and  Country 

The  city  depends  upon  the  country  for  food-stuflFs  and 
raw  materials.     The  country  depends  upon  the  city  for 


THE  ECONOMIC  V\<(  )P.LEMS  OF  CITIES    273 

manufactured  goods,  including  many  of  the  necessaries 
of  life.  Generally,  however,  there  is  too  little  under- 
standing of  the  dependence  of  each  upon  the  other.  The 
city  i)eople  do  not  understand  the  problems  of  the  country, 
and  the  count r\-  i)eople  do  not  understand  the  problems 


Connecting  country  and  city 


of  the  city.     As  a  result  each  suspects  the  other  of  un- 
fairness and  profiteering. 

From  an  economic  point  of  view  there  should  be  the 
closest  relation  between  the  business  of  the  country  and 
the  business  of  the  city.  Facilities  for  transportation 
should  be  made  as  efficient  as  possible,  so  that  the  goods 
of   citv   and    countrv    mav    be    interchanged    with    ease. 


274      FXONOMICS  AND  THE  COMMUNITY 

Storage  facilities  should  be  made  available  and  easily 
accessible.  Moreover,  the  buying  and  selling  of  goods 
between  city  and  country  should  l>e  as  direct  as  possible. 
City  markets  and  cooperative  movements  have  been  de- 
veloped to  simplify  the  exchange  of  goods  between  pro- 
ducers and  consumers  in  city  and  country,  but  these  have 
only  begun  to  solve  the  problems  of  getting  goods  from 
producer  to  consumer.  Frequently  apples  sell  for  twelve 
cents  a  jKiund  at  the  grocery,  or  six  dollars  a  bushel,  while 
thousands  of  bushels  are  rotting  under  the  trees  in  the 
country  because  the  farmers  are  not  offered  enough  to 
pay  the  cost  of  gathering. 

The  Planned  City 

It  is  apparent  that  a  great  deal  of  the  economic  problem 
of  distribution  of  goods  is  connected  with  the  planning  of 
cities.  City  planning  becomes,  therefore,  of  the  greatest 
concern  to  all  people,  whether  they  live  in  the  city  or  the 
country.  Cities  are  the  distributing  centers,  and  raw 
materials  must  l^e  brought  in  and  manufactured  articles 
shipped  out.  The  population  must  be  fed  and  housed. 
The  city  that  is  correctly  jjlanned  provides  for  these  things 
to  the  fullest  possible  extent,  and  prepares  for  the  future 
by  creating  facilities  that  may  be  readily  enlarged  from 
time  to  time  as  needed. 

The  properly  planned  city  so  arranges  its  industries  and 
its  transportation  as  to  prevent  congestion  at  any  point. 
It  establishes  zones  where  houses  may  be  built,  and  also 
where  industries  may  be  constructed.  It  builds  convenient 
freight  and  passenger  terminals,  union  stations,  ware- 
houses, and  transfer  facilities.  It  prevents  congestion  at 
certain   points  by  limiting  the  height  of  buildings.      It 


THE.  ECONOMIC  PROBLEMS  OF  CITIES    275 

provides  parks  and  play-grounds  and  proper  housing  to 
promote  the  efficiency  of  the  people.  It  provides  for 
safety,  sanitation,  and  health  measures,  including  the 
adequate  disposal  of  waste.  These  things  are  done  by 
the  city  not  only  because  it  is  the  right  thing  to  safeguard 
health  but  also  because  it  pays  the  city,  its  industries,  and 
its  people. 

Questions  and  Problems 

1.  What  were  the  causes  for  the  beginning  and  growth  of 

the  following  cities:  New  York,  Chicago,  Cleveland, 
Youngstown,  New  Orleans,  Flint.  Atlanta,  St.  Louis, 
Toledo.  Rochester,  Brockton"'' 

2.  What  were  the  causes  of  growth  of  )our  own  city  and 

of  neighboring  cities  ? 

3.  Name  some  cities  and  towns  that  have  grown  as  a  result 

of  one  or  more  of  the  causes  of  city  growth  set  forth 
in  this  chapter. 

4.  Describe  the  passenger  terminal  facilities  of  your  city 

or  of  the  nearest  large  city. 

5.  Estimate  the  losses  of  time  for  the  passengers  coming 

in  or  going  out  from  the  terminals  of  your  city. 

6.  What  facilities  are  there  in  your  city  for  belt  railroads, 

storage,  grain-elevators,  or  wharves?  Are  these 
facilities  easy  of  access  for  the  people  and  the 
industries? 

7.  Study  the  street  plan  of  your  city  or  of  a  near-by  city, 

and  discuss  its  merits. 

8.  Study  the  plan  of  roads  leading  into  the  country,  and 

discuss  its  merits. 

9.  What  is  the  condition  of  the  roads  and  streets  that 

form  the  links  between  city  and  country? 

10.  Discuss  fully  the  relation  between  good  housing  and 

industrial  efficiency. 

11.  Why    should   the   heights    of   buildings    be    limited   in 

cities  ? 

12.  Discuss  fully  the  dependence  of  city  and  country  upon 

each  other. 


276       ECONOMICS  AND  THE  COMMUNITY 

References 

Goodnow  and  Bates,  Municipal  Government. 

Howe.  The  Modern  City. 

Nolen,  City  Planning. 

Bird,  Town  Planniny  for  Small  Cominuiiities. 


CHAPTRR  XVIII 

INTERNATIONAL    TRADE 

Couununity  Survey 

1.  What  products   from  y(jur  coninninity  are  shipped  in 

large  quantities  to  foreign  countries? 

2.  Get  examples  from  the  local  bankers  of  the  payment 

for  goods  sent  abroad  and  for  goods  sent  here  from 
other  countries. 

3.  For  what  products  of  daily  use  are  we  dependent  upon 

other  countries  ? 

In  previous  chapters  we  have  seen  how^  the  United 
States  depends  upon  other  countries  for  goods  that  we 
want,  and  how  we  send  our  goods  to  all  parts  of  the 
world  to  supply  the  w-ants  of  consumers.  Our  merchants 
and  manufacturers  have  agents  in  many  foreign  lands. 
Foreign  merchants  and  manufacturers  likewise  have 
agents  in  this  country.  People  of  all  countries  exchange 
products;  otherwise  people  could  not  supply  all  of  their 
wants.  Goods  brought  into  a  country  are  called  imports ; 
goods  sent  out  of  a  country  are  called  exports. 

We  get  a  clearer  view  of  the  exchange  of  products 
between  countries  by  showing  the  actual  exchange  of 
goods  between  this  country  and  the  other  countries  of 
the  world. 

277 


278      ECONOMICS  AND  THE  COMMUNITY 

The  total  value  of  our  imports  and  exports  for  each 

year  from  1910  to  1920  is   given  in  the  following  table: 

Value  of  I.Mit)RTs  anu  Exports  1910-1920 

Imports  Exports 

1910    $1,556,947,430    $1,710,083,998 

191 1     1.527.226,105  2.013.549,025 

1912    1.6^3.^4.934  2.170.319,828 

1913    1,813,008,234  2,428.506.338 

1914    1.893.925.657  2,329,684,025 

1915    1.674,169.740  2,716.178,465 

1916    2.197.883.510  4.272,177,579 

1917    2.659,355.185  6.227,164,050 

1918    2.945.655,403  5,838,652,057 

1919    3. 904364. 93 -2  7.749.815.556 

1920    5,278,481.490  8.080.480.821 

The  following  table  shows  some  of  the  principal  items 

of  our  imports  and  exports : 

Imports,  Fiscal  Year  1919 

Crude  Materials  for  Use  in  Manufacturing $1,250,715,064 

Food-stuffs  in  Crude  Condition,  and  Food  Animals...  376.228,130 

Food-stuffs  Partly  or  Wholly  Manufactured 456,241,348 

Manufactures  for  Further  Use  in  Manufacturing 605,826,278 

Manufactures   Ready  for  Consumption 393. 194.577 

Miscellaneous 13,671,185 

Exports,  Fiscal  Year  1919 

Crude  Materials  for  Use  in  Manufacturing $1,215,960,910 

Food-stuffs  in  Crude  Condition,  and  Food  Animals 719,715.294 

Food-stuffs   Partly  or  Wholly  Manufactured 1.785,179.560 

Manufactures  for  Further  Use  in  Manufacturing....  952,775,871 

Manufactures  Ready  for  Consumption 2,384,801.297 

Miscellaneous I5.577.897 

We  have  already  seen  that  countries  specialize  in 
certain  products,  just  as  do  our  communities  and  indi- 
viduals. Some  countries  produce  all  or  the  bulk  of  certain 
goods,  and  other  countries  rely  upon  them  for  these  goods. 
Nearly  every  country  produces  <;ome  products  important 
to  the  needs  of  the  people  of  other  countries. 

Trade  with  other  countries  is  accepted  as  an  ordinary 
fact.     All  informed  people  recognize  the  dependence  of 


INTERNATIONAL  TRADE 


279 


one  country  upon  another  for  many  products  to  supply 
the  wants  of  consumers.  As  civiHzation  increases  this 
dependence  increases.  The  growth  of  science  and  inven- 
tion makes  it  necessary  to  seek  new  sources  of  products. 
The  invention  of  the  automobile,  for  example,  increased 
our  interest  in  and  dependence  upon  tropical  countries  for 


American  Legation,  Portu^.u. 


\\   ML  1  L"     111  11  Cl  LllL 


iL>  may  be  ironed  out 


rubber.  The  growth  of  the  electrical  industry  required 
a  world  search  for  platinum,  and  a  dependence  upon  the 
United  States  for  copper. 

Protection  of  Foreign  Traders 
One  of  the  first  problems  in  international  trade  is  that 
of  safety  for  the  traders  and  their  business  in   foreign 
lands.     Every   civilized   country    strives   to   protect    the 


28o      ECONOMICS  AND  THE  COMMUNITY 

rights  of  foreign  traders  as  long  as  they  obey  the  laws. 
Every  civilized  country  expects  of  every  other  country 
that  protection  will  be  given  to  the  rights  of  its  citizens. 
A  French  enterprise  in  the  United  States  recevies  the 
same  protection  as  an  American  enterprise,  provided  it 
observes  the  laws  of  the  country. 

The  problem  of  protection  of  persons  and  property  in 
foreign  lands  becomes  serious  in  uncivilized  countries,  or 
in  countries  torn  by  revolutions,  where  the  authorities  are 
not  strong  enough  to  assure  protection.  The  problem  is 
also  a  serious  one  in  countries  whose  officials  are  corrupt 
and  unscrupulous  and  therefore  unreliable.  As  a  rule, 
international  trade  is  on  a  high  level  of  fair  dealing. 
Each  country  knows  that  it  must  treat  others  fairly,  so 
that  its  people  will  be  treated  likewise.  Self-interest  of 
itself  tends  to  promote  international  good  will. 

Consuls  and  Agents 
The  trade  relations  between  countries  are  so  intimate 
that  nearly  all  countries  send  representatives  to  other 
countries  to  look  after  the  trade  interests  of  their  people. 
Such  representatives  are  called  consuls  or  consular  agents. 
These  representatives  help  to  adjust  differences  arising  in 
matters  of  trade  by  their  countrymen;  keep  their  govern- 
ment informed  of  trade  relations;  and  give  information 
that  may  help  to  promote  trade.  They  are  advisers  in 
controversies  and  serve  as  the  connecting  link  to  present 
matters  in  dispute  to  the  authorities  of  the  countries  in 
which  they  are  serving.  On  the  whole,  they  are  friendly 
visitors  and  arbiters  to  keep  things  running  smoothly  by 
settling  trade  difficulties  before  they  become  acute. 


INTERNATIONAL  TRADE  281 

Ambassadors  and  Ministers 

These  officials  represent  a  country  in  all  its  relations 
to  another.  Representatives  in  the  more  important  coun- 
tries are  called  ambassadors;  in  others  they  are  called 
ministers.  They  reside  in  the  country  to  which  they  are 
sent,  in  order  to  promote  good  relations.  Problems  of 
trade  present  many  questions  that  cause  differences  of 
opinion,  and  the  ambassadors  or  ministers  are  called  upon 
to  deal  directly  with  the  <:^overnment  in  their  settlement. 
The  ambassadors  and  ministers  are  friendly  visitors  to 
promote  harmony  and  good  feeling  and  therefore  better 
trade  relations  between  countries  through  better  under- 
standing of  each  other's  aims  and  purposes. 

Trade  Restrictions 

A  country  may  prohibit  the  exportation  or  importation 
of  goods,  or  may  levy  tariffs  on  goods  imported  or 
exported.^  The  citizens  of  another  country  have  no  right 
to  complain  of  such  prohibition  or  taxes ;  these  are  matters 
for  each  country  to  decide  for  itself.  Two  or  more  coun- 
tries may  agree  to  grant  certain  privileges  to  each  other's 
citizens.  Reciprocity  is  the  term  applied  to  such  mutual 
agreements. 

Countries  may  pass  laws  affecting  foreigners  doing 
business  within  their  borders,  and  there  can  be  no  cause 
for  complaint  unless  there  is  unfair  discrimination ;  but 
the  citizens  of  other  countries  have  the  right  to  know  the 
laws  and  to  seek  protection  under  them.  All  civilized 
countries   support  the   lawful   rights  of  their  people  in 

*  The  United  States  Constitution  prohibits  the  levying  of  a  tax  or 
duty  on  exports  from  any  state. 


282      ECONOMICS  AND  THE  COMMUNITY 

other  countries.     Sometimes  it  is  difficult  to  enforce  those 
rights  in  countries  where  disorder  reigns. 

Tariffs 

A  tariff  is  a  tax  levied  upon  the  privilege  of  importing 
or  exporting  goods.  All  countries  levy  a  tariff  upon 
goods  imported.  A  few  countries  also  levy  a  tariff  upon 
goods  exported.  The  United  States  levies  a  tariff  on 
imports,  but  is  prohibited  by  the  Constitution  from  levying 
a  tariff  on  exports. 

When  the  tariff  upon  imports  is  levied  at  a  high  rate, 
with  the  intention  of  restricting  the  importation  of  goods, 
it  is  called  a  protective  tariff,  because  it  is  designed  to 
protect  home  industries  from  foreign  competition.  When 
it  is  levied  at  a  low  rate,  with  the  intention  of  collecting 
revenue  but  not  seriously  restricting  importation,  it  is 
called  a  tariff  for  revenue  only. 

Examples  will  illustrate  fully  these  definitions.  If  it 
costs  $ioo  to  manufacture  an  article  in  this  country,  that 
same  article  could  not  be  imported  successfully  from 
another  country  unless  its  cost  of  manufacture,  plus  the 
cost  of  transportation,  were  no  greater  than  $ioo.  If 
the  cost  of  manufacture  in  another  country  were  $75  and 
the  cost  of  transportation  $10,  then  it  would  be  profitable 
to  import  it.  Now,  if  the  tariff  on  the  article  were  $25, 
the  total  cost  to  the  foreign  manufacturer  would  be  $110, 
and  the  article  could  not  be  imported  successfully  in  com- 
petition with  the  home  manufacturer,  whose  cost  is  $100. 
Such  a  tariff  would  be  a  protective  tariff.  On  the  other 
hand,  a  tariff  of  $5  would  not  prevent  importation,  be- 
cause it  would  make  the  cost  only  $90  to  the   foreign 


INTRRNATTONAL  TRADi:  283 

manufacturer.  Such  a  tariff  would  be  one  for  revenue 
only. 

The  term  free  trade  is  used  more  commonly  to  exjiress 
the  opposite  of  ])rotection  ;  but  free  trade  is  in  practice 
generally  a  tariff  for  revenue  only.  'Idie  bulk  of  imjKjr- 
tations  are  taxed  to  some  extent  under  a  so-called  free- 
trade  policy,  althoui^h  some  articles  are  imported  entirely 
free  from  any  tariff. 

We  have  used  both  the  policy  of  protection  and  of  free 
trade  in  the  United  States  at  different  times.  The  issue 
as  to  whether  the  one  or  the  other  shall  ])e  adopted  is 
always  prominent  in  national  elections.  Actually  we  have 
some  articles  that  are  admitted  free,  some  upon  which  a 
tariff  for  revenue  is  levied,  and  others  that  are  protected 
by  a  high  tariff. 

The  approved  idea  to-day  is  to  study  the  costs  of  pro- 
duction at  home  and  abroad  and  levy  taxes  at  rates  that 
will  be  more  scientifically  planned.  The  United  States 
Tariff  Commission  has  been  created  for  that  purpose. 
It  has  been  conducting  extensive  investigations  of  the  cost 
of  manufacture  of  various  products  at  home  and  abroad. 

The  policy  of  protection  or  free  trade  will  probably  be 
a  political  issue  for  some  time.  Those  who  favor  pro- 
tection declare  that  American  labor  ought  not  to  compete 
with  the  poorly  paid  labor  of  other  countries,  and  that 
American  industries  ought  to  be  protected  against  the 
competition  of  other  countries.  They  maintain  that 
young  industries — the  infant  industries — should  be  al- 
lowed to  get  a  start  before  being  subject  to  the  competition 
of  older  industries. 


284       FXOXOMICS  AND  THE  COMMUNITY 

The  opponents  of  protection  argue  that  it  promotes 
monopoly  by  cutting  off  outside  competition.  Prices  are 
thereby  increased.  They  are  wilHng  to  protect  infant 
industries  while  they  are  starting,  but  object  to  their  being 
dependent  permanently  on  protection.  They  claim  that 
American  industry  can  meet  any  competition  without  pro- 
tection. Ijecause  of  the  inventive  genius  of  American 
workers  and  efficient  management  by  American  em- 
ployers. 


Where  we  buy  our  goods 

Balance  of  Trade 

The  difference  between  the  amount  a  country  imports 
and  the  amount  it  exports  is  called  the  balance  of  trade. 
If  the  country  imports  more  than  it  exports,  the  balance 
of  trade  is  said  to  be  unfavorable.  If  exports  exceed 
imports,  it  is  said  to  be  a  favorable  balance  of  trade. 

The  United  States  has  had  a  large  balance  of  trade 
in  its  favor  for  a  number  of  years.  In  19 19  the  balance 
was  $3,978,000,000.  The  total  balance  of  trade  for 
1 909- 1 9 19  exceeds  $16,000,000,000.     How  is  this  balance 


INTERNATIONAL  TRADE 


285 


settled?     If  it  were  paid  in  gold,  the  whole  gold  supply 
would  soon  be  gathered  in  this  country. 

To  understand  this  question  attention  should  be  directed 
to  the  whole  range  of  dealings  between  different  countries. 
The  importing  and  exporting  of  goods,  which  gives  rise  to 
the  balance  of  trade,  are  not  the  only  transactions  between 
countries.  Before  the  war  European  investors  bought 
large  amounts  of  public  and  private  bonds  and  securities 
in  this  country.     Investments  were  made  by  them  in  the 


The  customers  of  the  U.  S.  Percentage  of  our  exports  sent  to 
each  Grand  Division  in  1920 


United  States,  Canada,  South  America,  Asia,  and  Africa. 
Since  the  war  the  condition  has  been  reversed,  and  thf 
people  of  the  United  States  have  been  buying  back  the 
securities  held  abroad  and  have  been  investing  in  European 
bonds  and  in  enterprises  of  South  American  and  Asiatic 
countries.  Large  loans  are  made  by  international  bankers 
in  America  to  different  countries. 

Before  the  war  travelers  from  America  to  Europe  spent 
nearly  $200,000,000  every  year.     Large   sums  are  also 


286      ECONOMICS  AND  THE  COMMUNITY 

carried  back  to  Europe  by  emigrants  returning  from  this 
country. 

It  is  clear  from  these  ilhistrations  that  there  is  great 
variety  and  extent  in  international  financial  transactions, 
and  that  if  actual  money  had  to  be  shipped  to  handle  each 
transaction,  the  money  of  the  world  would  be  in  transit 
from  country  to  country  most  of  the  time. 

The  problems  of  international  finance  are  well  illus- 
trated by  examples  growing  out  of  the  war.  The  Allied 
countries  purchased  large  amounts  of  supplies  in  the 
United  States.  The  balance  of  trade  grew  heavily  in 
favor  of  this  country.  France  and  England  secured  a  large 
loan  in  the  United  States  with  which  to  purchase  supplies. 
The  money  furnished  by  the  loan  was  not  taken  out  of 
this  country.  After  the  United  States  entered  the  war 
the  government  lent  the  Allied  countries  several  billions 
of  dollars.  The  money  from  these  loans  was  paid  out  in 
this  country  for  goods.  At  the  same  time  large  amounts 
of  American  bonds  and  securities  bought  by  England  and 
France  before  the  war  were  sold  back  to  investors  in  this 
country.  Investments  by  the  people  of  Allied  countries 
in  South  America  were  also  sold  to  American  interests. 
These  loans  to  the  Allies  and  sales  by  them  supplied  the 
means  to  offset  the  large  balance  of  trade  that  otherwise 
would  have  drained  Europe  of  gold. 

In  the  future,  if  trade  continues  so  largely  in  favor  of 
the  United  States,  it  must  be  balanced  largely  by  invest- 
ments in  other  countries  and  loans  to  governments  or 
individuals  by  American  bankers  and  investors.  The 
stream  of  money  can   not  run  one  way   forever.     The 


INTERNATIONAL  TRADE  287 

United  States  must  \mi  hack  into  the  stream  nearly  as 
much,  in  the  long  run,  as  it  takes  out. 

International  Exchange 

The  process  of  foreign  exchange  may  be  clescril)ed  by 
examples.  An  American  exporter  sells  ten  thousand 
dollars'  worth  of  cotton  to  a  dealer  in  England.  The 
cotton  is  insured  against  loss  and  is  shipped  to  England. 
The  exporter  takes  the  bill  of  lading  and  the  insurance 
papers  to  an  international  banker  or  broker  and  draws  a 
draft  against  the  dealer  in  England.  The  banker  or 
broker  sends  the  draft,  the  bill  of  lading,  and  insurance 
papers  to  his  correspondent  in  England  for  collection. 

The  English  dealer  can  not  secure  the  bill  of  lading, 
and  therefore  can  not  secure  the  goods,  w'ithout  arranging 
for  the  payment  of  the  draft.  The  American  banker  is 
protected  by  the  bill  of  lading,  which  represents  the  owner- 
ship of  the  cotton.  The  American  exporter  probably 
received  his  money  at  once  from  his  banker  or  broker, 
who  assumed  the  responsibility  in  the  transaction.  Some- 
times the  draft  is  not  accompanied  by  the  bill  of  lading 
if  the  banker  has  entire  confidence  in  his  client's  financial 
ability. 

The  Rate  of  Exchange 

Before  the  European  war  London  was  the  acknowd- 
edged  financial  center  of  the  world,  and  the  bulk  of  foreign 
exchange  was  in  pounds  sterling.  The  exchange  rate  of 
the  pound  in  American  dollars  was  $4.8665.  If  pounds 
sterling  sold  for  more  thrui  that  when  they  w^ere  in  special 


288      ECONOMICS  AND  THE  COMMUNITY 

demaml.  they  were  said  to  l:>e  at  a  premium.  If  they  sold 
for  less  when  deniaiid  was  slack,  they  were  said  to  be  at 
a  discount.  The  pound  sterling  was  the  standard  measure 
in  international  banking. 

Since  the  war  the  financial  capital  of  the  world  has 
shiftetl  partly  to  New  ^'ork,  which  now  disputes  with 
London  the  financial  leadership  of  the  world.  The  dollar 
is  now  more  generally  used  in  international  exchanges, 
partly  because  of  the  predominance  of  America  in  financial 
matters,  and  partly  because  of  the  greatly  depreciated  and 
fluctuating  value  of  the  pound,  the  mark,  and  the  franc. 

Razv  Materials  and  International  Trade 

The  source  of  supi)ly  of  raw  materials  is  an  important 
and  increasing  i)roblem  of  international  trade.  It  is  im- 
portant l^ecause  no  nation  supplies  all  of  its  own  raw 
materials.  It  is  increasing  because  of  the  growth  of 
science  and  invention  and  the  increased  need  for  special 
raw  products. 

International  troubles  have  arisen  frequently  because  of 
the  demand  for  raw  materials.  History  furnishes  many 
examples.  The  blockade  of  the  South  during  the  Civil 
War  cut  ofif  the  supply  of  cotton  from  the  mills  of 
England.  The  mills  closed,  thousands  were  thrown  out 
of  employment,  and  distress  followed.  The  ill  feeling 
resulting  brought  us  to  the  verge  of  war  with  England. 

Another  example  discloses  our  absolute  reliance  upon 
international  trade.  A  few  years  ago  an  insurrection  in 
Mexico   shut   off   for   a   time  the   supply  of   sisal    from 


INTERNATIONAL  TR ADI':  289 

Yucatan.  Sisal  was  a  necessity  in  niakinj;-  hinder  twine. 
P<in(Ier  twine  was  a  necessity  in  harvestini^  the  i^aain  croi). 
The  food  supj)ly  was  menaced  hy  tlie  cutting  off  of  what 
seemed  to  he  a  minor  product.  In  the  long  run  suhstitutes 
would  have  been  found  for  sisal,  but  for  the  time  being 
the  cutting  off  of  the  sujjply  was  a  serious  matter.  Ex- 
amples of  this  character  might  be  multiplied. 

'i1ie  w^ar  and  its  period  of  reconstruction  have  empha- 
sized anew  the  importance  of  the  supply  of  raw  materials. 
The  strategy  of  the  (lernian  armies  was  based  upon  the 
plan  of  seizing  the  sources  of  basic  materials  such  as  coal, 
iron,  and  oil.  Each  military  drive  had  an  economic  goal. 
The  peace  conference  had  no  more  difficult  problem  than 
the  distribution  of  the  sources  of  raw^  material.  The  coal 
and  iron  deposits  of  Germany  w^re  jiartly  transferred  to 
b>ance.  It  was  plain  that  all  of  these  resources  could  not 
l)e  taken  away  from  (k^rmany  without  rendering  that 
country  helpless,  and  consequently  destroying  its  power 
to  meet  its  obligations. 

The  future  international  problems  are  bound  to  center 
more  and  more  around  the  ownership  and  distribution  of 
raw  materials.  There  is  no  power  to  compel  a  nation 
to  share  its  store  of  raw  materials  with  other  nations,  but 
there  is  an  international  good  will,  wdiich  can  not  be 
flouted.  Probably  the  solution  of  the  problem  in  the 
future  will  rest  upon  the  iJromotion  of  the  feeling  of  fair 
play  among  nations  and  the  enforcement  of  economic 
consequences  in  the  form  of  retaliation  upon  those 
countries  that  attempt  to  monopolize  important  world 
necessities. 


J90       ECONOMICS  AND  THE  COMMUNITY 

Questions  and  Problems 

What  is  international  trade ? 

What  would  be  some  of  the  results  if  all  our  foreign 

trade  were  stopped  ? 
Why   should   a   nation   protect   its  citizens   in   foreign 

countries  ? 

4.  How  far  should  that  protection  extend? 

5.  Make  investigations  in  other  books,  and  after  inquiries 
discuss  fully  the  merits  of  protection  and  free  trade. 

Why  should  infant  industries  be  encouraged  and  pro- 
tected by  high  tariffs? 

Should  an  infant  industry  engaged  in  the  production 
of  a  luxury  be  protected  by  high  tariffs? 

8.  Should  taxes  on  exports  be  levied  ? 

9.  How  would  you  send  money  to  London  ?     The  Argen- 

tine Republic  ? 

10.  Make  inquiries  of  bankers  and  brokers  regarding  the 

exact   method   that   would   be   followed   in    settling 
accounts  in  different  countries. 

11.  What  is  the  value  of  a  favorable  balance  of  trade  to 

a  country  ? 

12.  What  steps  are  necessary  for  the  people  of  the  United 

States  to  maintain  a  favorable  balance  of  trade? 

13.  What  is  the  balance  of  trade  of  the  United  States  in 

the   current   year?     How    does   it   correspond   with 
previous  years? 

References 

Clay,  Economics  for  the  General  Reader,  pages  204-213. 

Fetter,  Modern  Economic  Problems,  Chapters  14,  15  and 
16. 

United  States  Department  of  Commerce,  Bureau  of 
Foreign  and  Domestic  Commerce,  Reports. 


CHAPTER  XIX 

TAXATION 

Community  Survey 

I.  Make  a  list  of  all  kinds  of  taxes  collected  and  the 
amount  received  from  each  source  in  the  community 
for  local  purposes. 

.2.     What  property  is  not  taxed  ? 

3.  How  is  property  assessed? 

4.  How  are  taxes  collected  ? 

The  public  enterprises  that  people  carry  on  for  their 
mutual  benefit  and  protection  cost  large  sums  of  money. 
The  money  necessary  to  pay  for  these  common  benefits 
is  raised  by  taxation. 

The  people  conduct  their  affairs  on  a  different  principle 
than  that  on  which  individuals  conduct  their  affairs.  The 
individual  fits  his  expenditures  to  his  income ;  the  govern- 
ment decides  what  expenditures  are  necessary,  and  then 
proceeds  to  collect  the  necessary  income  by  taxation  to 
meet  the  expenditure. 

Taxation  takes  several  forms — property  taxes,  income 
taxes,  excise  taxes,  tariffs,  inheritance  taxes,  licenses,  and 
several  minor  forms. 

The  property  tax  is  a  direct  tax  upon  property.  Prop- 
erty is  assessed  at  its  full  value  or  at  some  fixed  part  of 
its  value,  and  upon  each  dollar  of  assessed  property  a 
certain  amount  is  levied.     Property  assessed  at  $io,0(X), 

291 


202       ECONOMICS  AND  THE  COMMUNITY 

subject  to  a  tax  of  $2  on  the  hundred,  will  pay  a  tax 
of  $200.  This  tax  is  based  upon  the  amount  of  property 
and  not  upon  what  the  property  yields.  It  is  the  form 
of  taxation  in  most  common  use  throughout  the  country, 
and  was  formerly  the  most  important  of  the  taxes  levied. 


©  u.  *  u. 


U.  S.  Treasury   Ruilfling,  Wasliinj^tcjii,   IJ.   C. 


Jncoiuc  Taxes 
Income  taxes  take  a  percentage  of  the  income  from  all 
sources.  They  are  levied  upon  personal  incomes  and 
also  upon  corporation  incomes.  The  amount  of  the  tax 
generally  increases  with  the  size  of  the  income.  Incomes 
below  a  certain  amount  are  generally  exempt  from  any 


TAXATION  293 

taxation.  As  the  amount  of  income  increases  the  per- 
centage of  the  tax  increases,  until  in  some  instances  half 
or  even  three  fourths  of  the  lart^er  incomes  are  taken. 
The  income  tax  is  based  upon  the  idea  that  the  income 
is  a  better  test  of  the  ability  to  pay  a  tax  than  is  the 
amount  of  property  possessed. 

Income  taxes,  both  personal  and  corporate,  are  levied 
by  the  federal  government.  Only  a  few  of  the  states  levy 
a  personal  income  tax,  but  several  levy  a  corporation 
income  tax. 

Excise  Taxes 

Excise  taxes  are  special  taxes  levied  against  certain 
kinds  of  goods,  such  as  liquor,  tobacco,  and  luxuries. 
These  taxes  are  levied  upon  the  theory  that  the  producers 
and  consumers  of  articles  of  no  social  value  can  afiford 
to  pay  for  the  privilege.  These  taxes  have  been  important 
sources  of  revenue. 

Both  the  states  and  the  nation  derive  revenue  from  this 
kind  of  taxes. 

Tariffs 

The  subject  of  the  tariff  has  been  discussed  under 
International  Trade.  As  a  system  of  taxation  it  consists 
in  levying  a  percentage  of  the  value  of  goods  imported 
into  the  country.  If  the  assessment  is  according  to  value 
it  is  an  ad  valorem  duty.  If  the  assessment  is  upon  a 
specific  object,  regardless  of  value,  it  is  known  as  a  specific 
duty. 

Tariffs  are  levied  only  by  the  federal  government.  The 
states  are  not  permitted  to  levy  such  taxes. 


294      ECONOMICS  AND  THE  COMMUNITY 
Inheritance  Taxes 

Inheritance  taxes  are  levied  against  property  trans- 
ferred by  gift  or  bequest.  Such  taxes  are  really  levied 
against  the  right  to  receive  property  by  inheritance,  rather 
than  against  the  property  itself.  Such  taxes  generally 
increase  as  the  amount  of  the  inheritance  increases.  Small 
inheritances  are  exempt.  As  the  amount  of  the  inherit- 
ance increases  the  tax  increases  until  in  large  inheritances 
sometimes  as  high  as  seventy-five  per  cent  is  taken  by 
taxation.  The  tax  also  increases  according  to  the  relation- 
ship of  the  person  who  inherits  or  receives  property.  The 
rate  charged  when  property  goes  to  a  son  or  daughter  is 
much  smaller  than  when  it  goes  to  a  distant  cousin  or 
to  a  person  not  related  by  blood.  When  the  tax  is  levied 
upon  inheritances  of  a  direct  descendant  it  is  called  a 
direct  inheritance  tax ;  when  it  is  levied  upon  inheritances 
by  others  than  direct  descendants  it  is  called  a  collateral 
inheritance  tax. 

Inheritance  taxes  are  levied  by  the  federal  government 
and  by  most  of  the  states. 

Licenses 

License  taxes  are  levied  for  the  privilege  of  doing  busi- 
ness in  certain  lines  or  for  public  privileges.  The  best 
known  of  such  taxes  are  the  automobile  licenses.  In 
some  states  virtually  all  occupations  and  businesses  are 
licensed  and  pay  a  tax.  The  amounts  are  not  generally 
based  upon  the  amount  of  business  done,  but  in  some 
cases  a  classification  is  made  and  different  rates  are 
charged  according  to  the  size  of  the  business.  For  ex- 
ample, the  tax  upon  ice-cream  parlors  is  often  based  upon 


TAXATION  295 

the    number    of    chairs    used    to    accommodate    patrons. 
The  states  and  the  nation  both  use  this  type  of  taxation. 

Foil  Tax 

In  addition  to  these  forms  of  taxation  there  is  the  poll 
tax,  which  is  a  tax  of  a  certain  amount  upon  each  male 
between  certain  ages. 

Special  Assessments 

The  cost  of  building  public  improvements  that  directly 
benefit  the  property  of  individuals  is  usually  covered  by 
assessments  made  against  the  property  benefited.  Side- 
walks, pavements,  sewers,  and  drainage  works  are  forms 
of  such  improvements  paid   for  by  special  assessments. 

The  method  of  assessment  is  usually  based  upon  foot 
frontage  in  the  case  of  sidewalks  and  pavements,  and 
upon  acreage  in  the  case  of  drainage. 

The  Basis  of  Pair  Taxation 

Taxes  are  collected  to  provide  for  the  common  good. 
It  is  the  duty  of  each  person,  therefore,  to  pay  his  fair 
share.  Just  taxation  requires  equality.  All  persons  must 
be  treated  alike  under  the  same  circumstances.  We  could 
not  permit  inequality  of  taxation  to  continue  without 
serious  harm. 

How  much  should  a  person  pay  in  taxes?  Some  have 
answered  this  question  by  saying  that  each  person  should 
pay  according  to  the  benefit  he  receives.  Others  maintain 
that  the  person  should  be  taxed  according  to  his  ability 
to  pay.  The  argument  against  the  benefit  theory  is  that 
benefits  can  not  be  measured.  How,  for  instance,  can  it 
be  determined  how  much  benefit  a  man  receives  from  the 


296      I':COX()MICS  AND  THE  COMMUNITY 

use  of  the  highways,  the  pubHc  hbrary,  parks,  or  play- 
grounds? Those  who  argue  for  taxation  according  to 
:ihiHty  to  pay  maintain  that  al)iHty  to  pay  is  i)ro])ortional 
to  income.  This  i)roposiiic)n  is  denied  on  the  ground  that 
the  receiver  of  a  small  income  can  not  pay  as  much  in 


^      V 

Line  of  taxpayers 


pro|)ortion  to  income  as  the  receiver  of  a  large  income. 
The  most  widely  accepted  idea  to-day  is  the  latter  theory, 
namely,  that  ability  to  pay  is  the  best  basis,  and  that  in- 
come is  the  best  measure  of  such  ability ;  but,  further 
than  that,  it  is  accepted  that  the  tax  should  increase  accord- 
ing to  the  size  of  the  income. 


TAXATION  297 

An  efficient  taxing  system  must  produce  revenue.  The 
test  of  a  taxing  system  is  the  ease  with  which  money  is 
collected.  The  failure  to  collect  poll  taxes  from  thousands 
of  men  has  caused  many  people  to  disapprove  of  that  form 
of  taxation.  Those  who  frame  taxation  laws  look  care- 
fully to  see  that  the  taxes  they  levy  will  actually  bring 
money  into  the  treasury. 

Taxes  must  be  easily  gathered  without  great  expense. 
A  system  of  taxation  that  would  cost  fifty  per  cent  merely 
to  collect  would  be  a  bad  system.  Only  fifty  per  cent  of 
the  total  tax  would  go  into  the  treasury,  the  rest  being 
used  for  the  machinery  of  collection. 

Taxation  must  be  definite.  Every  person  must  know 
exactly  what  he  is  expected  to  pay.  This  enal)les  tax- 
payers to  plan  and  i)rovide  for  the  means  of  paying  the 
tax.  The  taxpayer  must  know  also  the  exact  time  and 
place  of  payment,  so  that  he  may  have  the  money  to  pay 
the  tax  at  the  right  time  and  place. 

Taxation  systems  must  be  arranged  also  to  meet  the 
convenience  of  taxpayers.  A  taxing  system  that  required 
farmers  to  pay  their  taxes  in  April  or  May  would  be  a 
bad  system.  These  are  the  months  when  the  farmer  is 
investing  his  money  in  the  planting  of  crops.  He  could 
not  easily  spare  it  at  that  time  for  taxation.  Taxing 
systems  provide  generally  for  the  payment  of  taxes  in 
the  late  fall  or  early  winter,  thus  enabling  farmers  to  pay 
their  tax  from  the  harvest.  By  that  time  the  farmer  has 
also  paid  the  business  man  for  advances  and  credit,  and 
the  business  man  is  thereby  able  to  pay  his  taxes  more 
conveniently. 

Taxing  systems  should  also  fix  the  dates  of  the  taxable 


298       ECONOMICS  AND  THE  COMMUNITY 

year  to  conform  to  luisiness  practice.  Business  men 
usually  close  their  books  January  i.  The  federal  income 
tax  laws  properly  use  that  date  as  the  date  from  which 
taxes  are  reckoned. 

Effect  of  Taxation  upon  Business 
The  power  to  tax  is  the  power  to  destroy.  If  the 
government  levies  a  tax  greater  than  the  income  from  a 
business  or  a  piece  of  property,  it  gradually  takes  or 
confiscates  the  property  itself.  If  the  tax  is  so  high  that 
profits  can  not  be  made  from  a  business,  the  business  will 
not  be  continued.  When  taxes  are  light,  business  does 
not  feel  the  efifect.  When  taxes  become  heavy,  the  pro- 
ducer and  distributor  of  goods  must  consider  carefully 
the  amount  of  the  tax  in  the  cost  of  the  goods. 

The  study  of  taxation  is  an  important  duty  for  the 
business  man  and  the  law-makers.  Those  who  pass  the 
laws  fixing  the  taxes  should  take  into  consideration  the 
effect  that  the  taxes  will  have  upon  production.  If  taxes 
are  so  high  as  to  discourage  production,  they  do  not 
produce  revenue,  but  they  do  cause  harm.  To  tax  pro- 
duction so  heavily  as  to  stop  it  or  seriously  lessen  it 
is  to  kill  or  cripple  "the  goose  that  lays  the  golden  ^gg.'^ 
If  taxes  on  investments  are  so  high  as  to  discourage 
savings,  it  has  a  serious  social  efifect. 

Public  Debts 

Governments  go  into  debt  the  same  as  do  individuals. 
Whenever  there  is  a  piece  of  work  to  be  done  requiring 
large  expenditures  beyond  the  ability  of  the  present  taxing 
system  reasonably  to  provide,  bonds  are  issued  and  sold 
to   meet   the   cost.     Bonds   are   nothing   more   than   the 


TAXATION  299 

people's  notes.  They  are  the  promises  of  the  people, 
actinj,^  through  their  government,  to  pay  the  amount  of 
the  bonds  at  a  certain  time  in  the  future,  with  interest 
payable  at  intervals. 

Bonds  are  sometimes  issued  unwisely  to  meet  expendi- 
tures that  should  be  borne  out  of  present  taxes.  The 
issue  of  bonds  to  pay  the  salaries  of  i)ublic  employees 
would  be  bad  policy.  Jjonds  should  be  issued  only  for 
permanent  improvements,  the  benefits  of  which  are  shared 
by  future  generations.  Bonds  should  not  be  issued  for 
any  temporary  work  or  work  that  does  not  outlive  the 
date  of  payment.  Many  states  have  issued  lx)nds  for 
highway  construction,  running  for  periods  as  high  as 
fifty  years.  Highways  constructed  by  such  bond  issues 
have  frequently  been  worn  out  within  ten  years.  The 
future  generation  must  not  only  build  the  road  anew, 
but  in  forty  years  must  pay  for  the  w^orn-out  road.  Such 
a  plan  is  bad  business  finance,  and  therefore  is  bad  public 
finance.  Emergencies  may  arise  when  bonds  may  be 
needed  for  temporary  purposes,  but  such  bonds  should  be 
payable  at  the  earliest  possible  moment. 

Bonds  have  generally  been  issued  to  fall  due  at  a 
certain  date  in  the  future.  When  such  is  the  case  pro- 
vision must  be  made  to  have  the  money  at  hand  to  pay 
the  bonds  when  due.  The  money  needed  to  pay  can  not 
readily  be  collected  in  taxes  all  at  once.  The  sinking  fund 
has  been  used  for  the  purpose  of  providing  a  fund  to  pay 
debts  when  due.  Additions  are  made  regularly  to  the 
sinking  fund,  which,  together  with  the  interest,  equals 
the  amount  of  the  bonds  at  maturity.  A  newer  plan  is 
to  issue  serial  bonds.     Under  this  i)lan  an  issue  of  bonds 


300       l-XONOAIICS  AND  THE  COMMUNITY 

is  made  to  fall  due  at  different  times,  some  falling  due 
each  year  for  a  period  of  years,  thus  equalizing  the  burden 
of  payment.  This  is  the  method  which  all  business  con- 
cerns have  found  to  be  the  most  suitable. 

Proposed  Changes  in  Taxation 

Some  proposals  are  made  for  radical  changes  in  the 
system  of  taxation.     Among  the  most  important  are  the 


Where  the  income  of  the  states  Where  the  income  of  the  cities 

comes    from.      The    combined  conies    from.      The    combined 

revenues   of   all  of   the   states  revenues  of  cities  over  30,000 

in  1916  in   igi6 

proposals  for  the  classified  property  tax  and  the  single  tax. 
The  classified  property  tax  is  merely  an  attempt  to  tax 
projjerty  more  nearly  according  to  the  principle  of  ability 
to  pay.  Property  is  classified  roughly  on  that  basis,  and 
different  rates  are  applied  to  different  classes.  This  is 
merely  a  modified  form  of  the  general  property  tax.  The 
single  tax  is  a  tax  on  land  values  only.  Lands  are  taxed, 
while  improvements  are  not.  The  single  tax  is  based 
upon  the  proposition  that  the  rent  from  land  depends  upon 


TAXATION  301 

site  value,  or  the  value  of  the  location,  and  that  site 
value  depends  upon  "the  community  rather  than  upon  the 
individual  who  owns  the  land. 

It  is  arj^ued  that  when  a  piece  of  property  is  made 
valuahle  by  the  growth  of  a  city,  the  owner  is  not  entitled 
to  the  increase.  The  single  tax  is  not  in  full  force  in  any 
part  of  the  country,  but  the  idea  of  taxing  the  increase 
of  land  values  has  been  used  in  a  number  of  cities  in  the 
United  States  and  Canada. 

Taxation  as  Social  Control 

Since  taxation  may  be  made  high  enough  to  prevent 
the  production  of  certain  goods,  it  has  been  used  to  sup- 
press some  forms  of  production  and  service.  The  tax 
on  opium  im])()rtc(I  into  the  country  has  been  placed  so 
high  as  to  prohibit  its  im])ortation.  Federal  taxes  on 
products  of  child  labor  make  it  unprofitable  for  employers 
to  use  child  labor.  Taxation  by  the  federal  government 
of  ten  per  cent  on  bank  notes  issued  by  state  banks 
prohibits  their  use. 

Income  and  inheritance  taxes  have  been  frankly  advo- 
cated by  such  statesmen  as  Theodore  Roosevelt,  in  order 
to  prevent  the  growth  of  large  fortunes,  as  well  as  to 
produce  revenue.  IMany  such  illustrations  could  be  given 
where  the  power  of  taxation  is  used  as  a  means  of 
regulation  or  prohibition. 

Tax  exemptions  are  also  employed  to  promote  desirable 
forms  of  production.  Some  states  allow  exemption  for 
a  numl:)er  of  years  to  desirable  infant  industries.  Forest 
lands  are  sometimes  exempted  to  encourage  reforestation. 
Homes  are  sometimes  exempted  to  promote  building  and 


302      ECONOMICS  AND  THE  COMMUNITY 

home-owning.     Bonuses  are  also  paid  for  the  purposes 
of  promoting  desirable  enterprises. 

Shifting  and  Incidence 

It  is  a  matter  of  common  knowledge  that  in  many  forms 
of  taxation  the  tax  levied  is  not  borne  by  the  ones  upon 
whom  it  is  levied.     The  tax  is  shifted  to  someone  else. 

SPRINGFIELD,  MASS. 
1916  BUDGET 


How  the  cities  spend  their  rev- 
enues. Combined  expenditures 
of  all  cities  over  30,000  in  1916 


How  one  city's  money  is  spent 


The  place  where  it  really  falls  is  called  the  incidence  of 
taxation. 

The  tax  upon  producers  of  an  article  is  in  the  long  run 
added  to  the  cost  of  the  article  and  is  paid  by  the  consumer. 
The  tariff  charged  upon  imported  goods  is  passed  on  to 
the  consumer.  The  taxes  on  land  and  1)uildings  is  trans- 
ferred to  tenants  in  the  form  of  rents,  and  the  rents  in 
turn  are  added  to  the  cost  of  goods  to  the  consumer. 
License  taxes  are  merely  added  to  the  consumer's  bill. 


TAXATION  303 

Income  taxes  are,  to  some  dej^ree,  passed  on  to  consumers 
through  increased  rentals  or  increased  costs.  Inheritance 
taxes  may  not  be  passed  on  to  someone  else. 

Taxes  should  be  considered  with  a  full  understanding 
of  their  shifting  and  incidence.  It  is  not  so  important  to 
consider  the  person  who  pays  the  tax  money  to  the 
government  as  it  is  to  consider  the  effect  upon  those  who 
actually  bear  the  burden. 

Questions  and  Problems 

1.  Why  siiould  each  person  pay  taxes? 

2.  What  are  the  benefits  that  people  receive  from  govern- 

mental enterprises  ? 

3.  What  should  be  the  basis  in  determining  what  each 

person  should  pay  in  taxes? 

4.  Work  out  the  property  assessments  of  owners  of  prop- 

erty from  whom  you  can  get  the  data  regarding 
assessments. 

5.  What  is  the  rate  of  the  general  property  tax  in  your 

community?  How  much  of  this  goes  to  the  state? 
How  much  to  the  city?  How  much  to  the  county 
and  township? 

6.  Work  out  actual  cases  of  personal  income  taxes  under 

the  federal  law  and  state  laws. 

7.  Work  out  actual  cases  of  inheritance  tax  laws  under 

the  federal  law,  and  also  under  state  laws. 

8.  Get  information   concerning   rates   of   taxation   under 

license  and  excise  taxes  in  force  in  your  community. 
Work  out  actual  examples  of  such  taxes. 

9.  Work  out   examples  close  at  hand  of  special  assess- 

ments levied  for  sidewalks  or  street  improvements. 

10.  What  are  the  relative  merits  of  the  benefit  theory  and 

ability-to-pay  theory  in  taxation? 

11.  Why  should  the  small  incomes  be  exempt? 

12.  What  should  be  the  limit  of  such  exemptions? 

13.  What  is  the  value  of  certainty  in  taxation? 

14.  What  is  the  effect   upon  business   if   taxes   fluctuate 

widel}'  from  year  to  year? 


304       ECONOMICS  AND  THE  COMMUNITY 

15.  Should  governments  go  into  debt? 

16.  What  should  be  the  limit,  if  any,  of  such  indebtedness? 

17.  What  provision  should  be  made  to  pay  bonds  when 

due  ? 

18.  Discuss  taxation  as  a  means  of   regulation  or  prohi- 

bition. 

19.  ^\'hat  is  meant  by  "shifting  and  incidence  of  taxation"? 

References 

Fetter,  Modern  Economic  Problems,  Chapters  17,  18  and 
19. 

Plehn,  Public  Finance. 

Fillebrown,  A  B  C  of  Taxation  (Single  Tax). 
National  Tax  Association,  Proceedings. 
Hunter,  Outlines  of  Public  Finance. 


CHAPTER  XX 

CONSERVATION 

Community  Survey 

Give  examples  of  waste  of  resources  in  the  community,  and 
describe  the  measures  taken  to  conserve  and  protect  human 
beings,  forests,  soils,  minerals,  fish  and  game. 

Some  goods  that  are  consumed  are  not  replaceable; 
they  are  wholly  destroyed  in  consumption  and  no  further 
production  is  possible  from  them.  Coal  and  oil  taken 
from  the  earth  and  used  are  forever  destroyed,  and  when 
the  supply  that  was  stored  in  the  earth  is  gone  there  can 
be  no  further  sui)ply  provided. 

Other  productions  may  be  replaced  in  the  course  of 
time.  Trees  reproduce  themselves,  and  forests,  when 
cared  for,  will  keep  up  a  permanent  supply  of  wood 
products.  Soils  may  be  depleted  considerably,  and  then 
restored  in  time  by  the  application  of  proper  fertilizers. 
Metals,  when  used  in  manufactures,  are  not  destroyed, 
but  may  generally  be  used  over  again. 

Conservation  is  the  term  applied  to  the  wise  use  of 
unrej^laceable  products  and  to  the  wise  provision  for  the 
reproduction  of  replaceable  products.  It  is  the  policy 
of  foresight  that  keeps  the  welfare  of  the  future  in  view. 
It  would  be  unfair  to  deprive  future  generations  of  neces- 
sities by  our  present  wastefulness  of  products  that  can  not 

305 


3o6       ECONOMICS  AND  THE  COMMUNITY 

be  restored,  or  by  impairing  the  production  of  replaceable 
products. 

In  conservation  we  are  concerned  with  the  wise  use  of 
goods,  not  with  the  hoarding  of  goods.  We  are  concerned 
with  those  goods  that  are  limited  in  supply,  and  not  with 
those  that  are  limitless.  Coal  is  limited  in  supply. 
Building-sand  and  brick-clay  are  not  limited.  We  are 
concerned  with  the  saving  of  coal,  while  disregarding 
building-sand  and  brick-clay.  The  term  conservation  is 
also  applied  to  the  saving  for  public  use  of  certain  re- 
sources such  as  public  lands,  water-sheds,  and  water- 
power. 

Mineral  Conservation 

The  wise  use  of  minerals  that  are  limited  in  supply 
makes  an  immediate  appeal  to  all  men.  Most  of  the 
useful  minerals  are  limited  in  supply.  Great  hardships 
might  be  caused  by  their  exhaustion.  When  a  useful 
mineral  is  finally  exhausted  substitutes  will  probably 
have  l>een  found  in  most  cases.  Steam-power  may  be 
replaced  by  water-power  when  coal  is  exhausted.  Alum- 
inum may  l)e  more  widely  used  when  the  limited  supply 
of  iron  and  steel  is  used  up.  The  object  of  conservation 
should  be  to  save  exhaustil)le  minerals  until  satisfactory 
substitutes  are  available. 

Coal 

The  coal  resources  of  the  United  States  are  divided 
into  three  classes :  anthracite,  bituminous,  and  lignite. 
Anthracite  coal  is  relatively  scarce.  The  chief  deposits 
are  confined  t(^  about    four  hundred  and  eighty  square 


CONSERVATION  307 

miles  in  the  state  of  Pennsylvania,  containing  originally 
nineteen  and  one  half  billion  tons  of  coal.  Bituminous 
and  lignite  coals  are  found  over  wide  areas,  covering 
nearly  five  hundred  thousand  square  miles  in  different 
parts  of  the  country. 

It  was  estimated  in  1916,  for  the  United  States  Geo- 
logical Survey,  that  the  total  amount  of  coal  already 
mined  or  wasted  in  the  United  States  equaled  a  total  of 
15,083,000,000  tons,  and  that  there  were  left  in  the 
ground,  to  the  depth  of  three  thousand  feet,  workable 
veins  containing  3,538,000,000,000  tons.  It  would  ap- 
pear from  these  figures  that  less  than  one-half  of  one 
per  cent  of  the  original  coal  in  the  ground  has  been  mined 
or  wasted  in  mining.  These  facts  would  indicate  that  the 
coal  resources  of  the  country  will  last  for  several  hundred 
years. 

When  we  look  at  the  increase  of  production,  however, 
and  estimate  the  future  needs  upon  the  present  rate  of 
increase,  we  find  that  the  coal-fields  of  the  country  will 
be  virtually  exhausted  in  about  one  hundred  years.  Other 
estimates  place  the  probable  Hfe  of  coal-mines  at  two 
hundred  years.  It  is  certain,  however,  that  within  fifty 
years  the  best  and  most  accessible  veins  will  have  l^een 
mined.  Within  that  length  of  time  virtually  all  of  the 
hard  coal  will  have  been  used  up. 

The  conservation  of  coal  consists  primarily  in  the  pre- 
vention of  waste  in  mining  and  in  more  efficient  use. 
Fully  fifty  per  cent  of  the  coal  has  been  wasted  in  the 
process  of  mining.  Only  the  best  veins  were  mined, 
while  other  veins  were  allowed  to  cave   in.      Inefficient 


3o8       ECONOMICS  AND  THE  COMMUNITY 

methods  of  minin<:;  caused  large  losses.  It  is  estimated 
that  the  waste  in  mining  could  be  reduced  as  low  as  ten 
per  cent. 

The  second  waste  of  coal  is  found  in  the  method  of  its 
use.  Vast  quantities  have  been  wasted  in  the  manufac- 
ture of  coke  in  beehive  ovens.  The  introduction  of  the 
"retort"  has  largely  stopped  this  waste.  The  heat  energy 
of  coal  transformed  into  steam  ])roduces  only  about  8  per 


(Jpen  licartli  coke  ovens 


cent  of  the  heat  efficiency  of  the  coal.  Great  quantities 
of  heat  are  thus  wasted  in  the  manufacture  of  power, 
light,  and  heat,  and  in  poor  combustion,  which  results 
in  the  smoke  nuisance. 

The  progress  of  science  and  invention  is  showing  new 
ways  of  preventing  waste  of  coal  in  mining  and  waste 
of  heat  energy  in  using  coal. 

Petroleum  and  Natural  Gas 

'ihe  supply  of  petroleum  and  natural  gas  in  the  ground 
is  narrowly  limited.     Both  of  these  substances  have  been 


CONSI'.RVATION 


309 


shamefully  wasted.  Natural  gas  has  been  allowed  to 
escape  into  the  air,  and  in  many  producing  fields  gas  has 
been  allowed  to  l)urn  until  the  supi)ly  was  exhausted. 
Only  a  few  years  will  pass  before  natural  gas  as  a  fuel 
will  be  gone.  It  has  already  been  exhausted  in  the  great 
fields  near  indus- 
trial centers,  where 
it  could  be  most 
readily  used  in  pro- 
ductive industries. 

Petroleum  is  like- 
wise being  rapidly 
exhausted.  Van 

Hise    estimated    in 
1910      that      about 
one    tenth    of    our 
available  supply  of 
petroleum    had    al- 
ready    been     taken 
from    the    ground. 
The  rapid   increase 
in  production  would 
indicate    the    prob- 
able  exhaustion    of 
the  known  fields  by 
1940  or    1950.     The  conservation  of   petroleum  should 
be  directed  to  the  finding  of  substitutes  as  fuel.     Many 
such  substitutes  are  available  and  the  rapid  increase  in 
the  price  of  petroleum  may  hasten  the  perfecting  and  use 
of  these  substitutes. 


Tlie  waste  of  petroleum 


3IO      ECONOMICS  AND  THE  COMMUNITY 
Metallic  Resources 

The  problem  of  conservation  of  the  metallic  resources 
differs  from  the  conservation  of  fuel  resources  in  that 
they  may  \ye  used  indefinitely.  The  important  metals 
are  iron,  copper,  lead,  zinc,  gold,  and  silver.  Those  of 
lesser  importance  at  present  are  aluminum,  manganese, 
chromium,  nickel,  tin,  cobalt,  platinum,  vanadium,  and 
tungsten. 

Iron  is  by  far  the  most  important  metal  for  industrial 
use.  It  is  also  limited  in  supply.  The  l)est  estimates 
indicate  a  reserve  of  iron  ore  ranging  from  four  and  one- 
half  to  seven  and  one-half  billion  tons.  Other  possible 
resources  may  increase  the  supply  somewhat,  but  the  great 
increase  in  the  use  of  iron  points  to  the  probable  exhaus- 
tion of  the  supply  within  one  or  two  hundred  years. 
Substitutes  for  iron,  such  as  stone  and  cement,  will  prob- 
ably prolong  the  life  of  this  metal.  Iron  may  be  used 
over  and  over,  and  the  supply  decreases  only  gradually 
by  rust  and  wear.  The  resources  of  the  other  important 
metals  have  not  been  estimated,  and  the  probable  length 
of  life  of  the  supply  is  unknow^n. 

At  the  present  time  we  are  producing  more  than  seventy 
per  cent  of  the  world's  copper,  which  is  an  essential 
product  in  electrical  and  chemical  industries.  The  value 
of  the  product  makes  the  conservation  of  old  copper 
profitable,  and  very  little  of  the  metal  is  lost. 

Lead  is  another  metal  of  considerable  importance,  being 
used  principally  in  paint-making.  When  thus  used  it  is 
destroyed  for  further  use.  There  is  considerable  waste 
in  the  mining  of  lead  and  in  the  smelting  process,  and 
it  is  hoped  that  these  wastes  will  eventually  be  eliminated. 


CONSKRVATION  311 

Substitutes  are  also  likely  to  be  found.  Zinc  is  a  metal 
that  is  badly  wasted  in  mining  and  smelting;  it  is  also 
used  in  paint-making. 

Gold  and  silver  arc  carefully  conserved  both  in  pro- 
duction and  in  use.  The  world's  stock  of  gold  and  silver 
is  reduced  only  to  a  slight  extent  by  wear  and  tear  and 
by  industrial  processes.  The  supply  has  probably  reached 
its  maximum,  unless  some  new  mines  are  unexpectedly 
discovered.  The  importance  of  gold  as  the  standard  of 
value  in  virtually  all  countries  renders  it  important  that 
there  should  be  no  wide  fluctuation  in  supply. 

Soil  Resources 

There  is  a  clear  recognition  in  the  United  States  to-day 
that  national  welfare  depends  upon  making  soils  more 
productive.  Unless  we  can  increase  agricultural  produc- 
tion there  will  come  a  time  when  there  will  be  insufficient 
production  of  food-stuffs  to  feed  the  increased  popu- 
lation. So  important  is  this  subject  that  national  and 
state  agencies  are  working  to  promote  conservation  of 
soil  and  to  increase  production.  The  United  States 
Department  of  Agriculture,  the  state  departments  of 
agriculture,  experiment  stations,  agricultural  colleges,  and 
vocational  schools  are  all  studying  the  problem  and  train- 
ing farmers  to  apply  scientific  methods  to  the  cultivation 
of  the  soil. 

There  are  two  chief  ways  in  which  the  productive  power 
of  the  soil  is  decreased :  first,  by  erosion,  whereby  soils 
are  washed  away;  and,  second,  by  exhaustion,  or  the 
using  up  of  the  fertile  elements  of  the  soil  by  wrong 
methods   of  cultivation.     Erosion  can   be   controlled   by 


312       RCONOMICS  AND  THE  COMMUNITY 

proper  methods  of  plowing  and  terracing,  by  conservation 
of  forests,  and  by  the  prevention  of  floods.  It  has  been 
estimated  that  more  than  four  niilHon  acres  of  land  have 
alreatlv  lieen  destroyed  by  erosion.  This  would  indicate 
the  economic  importance  of  public  and  individual  action 
for  the  prevention  of  such  waste. 

The  exhaustion  of  soil  l)y  cultivation  is  due  principally 
to  bad  methods  of  fanning,  and  particularly  to  the  desire 
to  obtain  the  largest  immediate  crop,  without  regard  to 
future  crops.  Single  crops,  when  produced  year  after 
year  from  the  same  soil,  finally  use  up  the  available 
elements  of  the  soil.  Croi)  rotation  is  the  remedy  for 
this  condition.  Some  crops  put  into  the  soil  certain 
elements  that  other  crops  take  out. 

Another  method  of  preventing  soil  exhaustion  is  the 
use  of  fertilizers.  The  wise  use  of  fertilizers  that  supplv 
the  exhausted  materials  of  the  soil  will  keep  the  soils 
permancnlly  in  i)roductive  condition.  There  is  no  more 
important  matter  confronting  the  individual  farmer,  and 
the  country  as  a  whole,  than  the  maintenance  of  the  soil 
and  its  improvement. 

Forests 

The  forest  products  form  a  large  part  of  the  goods 
that  we  consume,  and  we  shall  have  to  rely  upon  them  for 
increased  production  in  the  future.  We  have  wasted  our 
forests  in  the  past,  cutting  them  down  to  make  room  for 
farms,  or  allowing  them  to  be  destroyed  by  fire  or  by 
plant  diseases,  until  we  now  have  only  a  small  part  of 
the  original  forests  of  tlie  country.  We  have  reached  a 
time,  however,  when  we  realize  their  value  not  only  as 
the  source  of  supi)ly  of  goods  that  we  need  Imt  also  as  a 


CONSERVATION 


313 


means  of  preventing-  floods  and  promoting  the  steady  flow 
of  streams  for  power  purposes. 

The  amount  of  forest  pro(kicts  that  we  use  is  enormous. 
While  some  sul)stitutcs  have  been  found,  such  as  cement, 
we  are  still  largely  dependent  u])on  wood  for  building 
materials.     More  than  twentv-three  billion  cubic  feet  of 


Ai 

Waste  from  forest  fires 

timber  is  taken  everv  vear  from  the  lorests.  The  larger 
part  of  this  goes  into  fire-wood,  timber,  shingles,  poles, 
posts,  rails,  cross-ties,  and  paper  pulp. 

The  conservation  of  the  forests  consists  in  the  pre- 
vention of  waste  in  cutting  and  manufacture,  in  the 
prevention  of  loss  from  fires,  and  the  reforestation  of 
lands  suitable  for  forest  purposes.  It  is  estimated  that 
only  three  eighths  of  the  original  wood  product  goes  into 


314      ECONOMICS  AND  THE  COMMUNITY 

the  manufactured  articles,  the  other  five  eighths  being 
wasted  in  manufacture. 

The  cutting  of  young  trees  and  the  destruction  of  young 
growth  cause  some  of  the  most  serious  losses  at  present. 
The  loss  from  forest  fires  is  enormous.  More  than  fifty 
million  dollars  is  lost  every  year,  and  many  thousands 
of  acres  are  burned  over.  Anyone  who  has  seen  the 
burned-over  areas  in  the  Adirondacks,  the  Maine  woods, 
or  the  woods  of  northern  Wisconsin,  knows  what  the  loss 
from  forest  fires  means.  This  loss  is  not  only  in  the 
destruction  of  timber,  but  also,  in  many  cases,  in  the 
destruction  of  the  soil  itself,  the  humus  of  the  soil  being 
burned  out. 

The  prevention  of  forest  fires  is  a  matter  of  individual 
care,  and  also  of  public  action.  The  national  government 
and  the  states  have  already  passed  laws  to  prevent  forest 
fires,  and  to  patrol  the  forest  reserves  to  prevent  the 
spread  of  fires. 

Water  Resources 

Water  is  one  of  our  basic  resources.  Without  it  life 
is  impossible.  The  problem  of  water  conservation  is  one 
of  supply  and  utilization.  Water  should  be  conserved  to 
equalize  the  flow  of  streams,  to  furnish  a  steady  flow  of 
water  for  canals,  irrigation,  and  water-power,  and  to 
provide  the  centers  of  population  with  a  supply  of  water 
for  domestic  and  industrial  use. 

The  economic  value  of  a  pure  water  supply  for  indi- 
vidual use  and  a  steady  water  supply  for  industrial  pur- 
poses can  not  be  overestimated.  The  control  of  a  resource 
so  vital  to  all  interests  should  plainly  rest  with  the  people. 


CONSERVATION  315 

To  a   large  degree   the  conservation   of   water   must   Ije 
carried  out  by  public  agencies. 

FisJi  and  Game  Resources 

Closely  related  to  the  forest  and  water  resources  are 
the  resources  in  fish  and  game.  Originally  in  most  forests 
there  was  an  abundance  of  game,  and  in  the  streams  an 
abundance  of  fish.  People  supplied  from  these  resources 
a  considerable  part  of  their  needs  for  food.  The  problem 
of  to-day  is  to  restore,  so  far  as  possible,  these  resources 
and  keep  them  constant.  Almost  every  state  in  the  Union 
is  taking  steps  to  preserve  fish  and  game.  This  is  done 
by  laws  to  prevent  the  taking  of  fish  and  game  in  certain 
seasons,  and  providing  for  the  hatching  of  fish  and  the 
breeding  of  game  to  restock  streams  and  forests.  New 
York  state  alone  has  l)een  spending  more  than  seventy-five 
thousand  dollars  each  year  in  the  work  of  fish-hatching 
and  distribution. 

The  federal  government  has  taken  action  to  preserve 
bird  life  through  the  passage  of  the  Migratory  Bird  Act, 
which  protects  birds  during  their  migration  from  one 
part  of  the  country  to  another. 

Human  Resources 

The  most  valuable  resource  of  any  country  is  its  human 
energy,  or  the  working  power  of  its  people.  This  resource 
determines  the  production  of  a  country.  Human  energ}' 
that  is  not  used  to  produce  is  wasted.  To  the  extent  to 
which  this  energy  is  allowed  to  go  to  waste,  the  com- 
munity suflfers. 

There  are  several   forms  of  waste  of  human  energ}'. 


3i6      ECONOMICS  AND  THE  COMMUNITY 

Professor  Thomas  Nixon  Carver  has  given  the  principal 
causes  as  ignorance,  idleness,  illness,  vice,  and  the  pro- 
duction of  goods  having  no  social  value.  Ignorance  is 
a  form  of  wasted  energy,  and  is  found  among  those  who 
are  ineffectually  employed.   The  misfits  waste  their  energy 


©u.  &o. 


Teaching  safety  first 


because  they  are  not  doing  work  that  they  are  capable  of 
doing  well.  Vocational  education  and  guidance  enter 
here,  and  are  of  economic  importance  in  fitting  men  to 
do  their  work  better. 

Idleness  as  a  source  of  waste  may  be  voluntary  or 
involuntary.     The  involuntarily  idle  are  those  who  are 


CONSERVATION  317 

unemployed  because  of  illness,  lack  of  training,  or  indus- 
trial conditions  beyond  the  individual's  control.  The 
voluntarily  idle  are  those  who,  of  their  own  free  will, 
cease  to  produce  while  they  are  physically  able  to  do  so. 

Illness  and  accident,  as  a  source  of  waste,  are  shown 
in  the  inability  of  the  disabled  to  produce  and  in  the  cost 
of  the  care  that  must  Ije  given  them. 

Sickness  and  death  can.  in  a  considerable  measure, 
be  prevented  by  intelligence  and  by  public  action.  It  is 
estimated  that  proper  health  measures  would  increase  the 
average  life  of  each  person  by  ten  to  fifteen  years.  At 
the  present  time  over  seven  working  days  a  year  are  lost 
by  each  worker  on  account  of  sickness.  Thousands  of 
workers  are  disabled  partially  or  totally  every  year  on 
account  of  accidents.  Sickness  and  accidents  represent  a 
serious  economic  waste  in  production,  and  thereby  cause 
loss  to  the  individual  and  to  society. 

The  other  causes  of  wasted  energy,  namely,  vice  and 
the  production  of  goods  that  are  not  useful,  are  important 
sources  of  waste.  The  user  of  drugs  or  of  intoxicating 
liquors  decreases  and  destroys  his  physical  energy.  The 
producers  of  liquor,  tobacco,  chewing  gum,  and  many 
other  products  waste  energy  by  producing  things  that 
have  no  social  value.  The  producers  of  many  luxuries 
waste  energy  that  would  be  better  directed  in  the  pro- 
duction of  necessities. 

So  important  has  the  conservation  of  working  power 
become  that  important  steps  have  been  taken  to  prevent 
accidents  and  disease  and  to  promote  efficiency  in  employ- 
ment. Laws  have  been  enacted  and  employers  and  em- 
ployees have  engaged  in  efforts  to  prevent  disabilities  from 
accidents  and  disease,  and  thereby  to  promote  the  con- 


3i8       ECONOAIICS  AND  THE  COMMUNITY 

servation   of   human    resources   as   well   as   to   increase 
production. 

Questions  and  Prohlmis 

1.  What  is  the  significance  of  the  conservation  of  un- 

replaceable  goods?     Of  replaceable  goods? 

2.  Bring  together  all  of  the  information  available  about 

the  destruction  of  soils  in  your  community  by  erosion 

or  poor  cultivation. 
What  are  the  principal  wastes  of  coal,  natural  gas, 

petroleum,  etc.  ? 
What  are  possible  substitutes  for  coal,  natural  gas,  and 

petroleum? 
What  are  the  uses  of  each  of  the  metals  mentioned  in 

this  chapter? 
Which  metals  are  most  essential  in  modern  industry? 
What  are  some  of  the  possibilities  of  these  metals  for 

the  future? 
What    are   the    principal    forms    of    waste    of    forest 

products  ? 
What  are  the  laws  of  your  state  for  the  protection 

of    fish    and    game?      Does    your    state    have    fish- 
hatcheries  ? 
ID.     What  are  human  resources  ? 

11.  Find  out  the  extent  to  which  the  safety  first  movement 

is  being  carried  out  in  your  city. 

12.  What  is  the  relationship  between  human  welfare  and 

industrial  efficiency? 

13.  What  are  the  forms  of  wasted  human  energy? 

14.  What    is   your   community   doing   to   promote    health, 

prevent  accidents,  give  vocational  education,  and  help 
the  disabled  ? 

15.  W'hy  should  we  take  interest  in  conservation  of  natural 

resources  ? 

References 

Van  Hise,  The  Conservation  of  Natural  Resources. 

Annual  Reports:  United  States  Geological  Survey;  United 
States  Department  of  Agriculture,  Bureau  of  Forestry. 

Reports,  State  Department  of  Geology,  Conservation  arui 
Forestry. 


CHAPTER  XXI 

STATISTICS   • 
Community  Survey 

Secure  examples  of  as  many  kinds  of  blanks  as  possible  used 
by  public  officers  in  collecting  information  about  births, 
deaths,  marriages,  contagious  diseases,  etc. 

One  can  not  study  economics  very  long  without  noting 
the  importance  of  statistics.  Some  people  consider  sta- 
tistics theoretical,  and  yet  business  undertakings  are  based 
more  or  less  upon  the  conclusions  of  statistics.  All  busi- 
ness men  use  statistical  data  in  some  form  in  conducting 
their  business. 

Statistics  are  facts  expressed  in  figures.  Single  facts 
need  no  interpretation,  but  when  a  number  of  facts  are 
used,  they  need  to  be  classified  so  that  conclusions  may 
be  drawn  from  them.  Facts  are  expressed  in  statistics 
by  tables,  charts,  or  graphs,  so  that  they  may  be  easily 
understood.  The  head  of  a  small  business  may  keep  all 
of  the  facts  of  his  business  in  his  head,  or  at  least  he  may 
not  need  to  tabulate  or  chart  them.  He  may  know  the 
wages  of  each  employee,  the  price  of  each  of  the  products 
he  uses  and  of  the  products  he  sells.  The  head  of  a  large 
concern  must  have  these  facts  classified,  tabulated,  or 
charted,  in  order  to  be  able  to  use  them  intelligently. 

319 


320      ECONOMICS  AND  THE  COMMUNITY 
Importance  of  Statistics 

The  value  of  statistics  is  well  expressed  by  Professor 
George  C.  Whipple  in  his  book  on  "Vital  Statistics,"  in 
which  he  says : 

It  is  of  the  greatest  importance  to  a  nation  that  accurate 
records  be  kept  of  its  vital  capital,  of  its  gains  by  birth  and 
immigration,  and  of  its  losses  by  death  and  emigration ;  for 
a  nation's  true  wealth  lies  not  in  its  lands  and  waters,  not  in 
its  forests  and  mines,  not  in  its  flocks  and  herds,  not  in  its 
dollars,  but  in  its  healthy  and  hajjpy  men,  women  and  chil- 
dren. 

A  well  man  is  worth  more  to  a  nation  than  a  sick  man; 
a  man  in  the  prime  of  life  is  of  more  immediate  worth  than 
an  old  man  or  a  child ;  a  married  man  is  potentially  a  greater 
asset  than  a  single  man.  Hence,  in  a  nation's  vital  book- 
keeping, the  number  of  people,  their  age  and  sex  and  con- 
jugal condition,  their  parentage,  their  health,  the  rate  of 
births  and  deaths,  are  matters  of  great  moment. 

Their  environment  is  also  important :  their  concentration 
in  cities  and  villages  and  congested  areas,  their  mode  of 
housing,  their  occupation,  their  state  of  intelligence,  their 
economic  condition,  their  knowledge  of  sanitation,  all  con- 
tribute to  the  sum  total  of  their  usefulness  to  themselves  and 
to  society. 

Equally  important  are  the  figures  of  business  activities 
that  show  the  number  and  distribution  of  the  producers 
and  consumers,  the  amount  of  production  and  consump- 
tion, the  wages  and  cost  of  living,  the  figures  of  domestic 
and  foreign  trade,  banking,  and  insurance. 

Statistics  of  Consumption,   Production, 
and  Distribution 

It  is  important  to  know  how  much  of  each  kind  of 
goods   is   consumed  every  year.     We  can   not  measure 


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A  Graphic  Presentation 
Trend  of  the  cost  of  living  1914-1921  by  principal  items 


322      ECONOMICS  AND  THE  COMMUNITY 

the  satisfaction  that  comes  with  the  use  and  consumption 
of  goods,  but  the  measure  of  satisfaction  may  be  estimated 
by  the  amount  of  use.  From  a  business  standpoint  it  is 
necessary  to  know  how  much  is  being  consumed  in  order 
to  know  how  much  to  produce.  From  a  social  point  of 
view  it  is  desirable  to  know  the  kinds  and  amounts  of 
goods  that  people  use.  Statistics  fill  an  important  place 
in  showing  the  amount  of  goods  consumed.  The  business 
of  production  and  distribution  waits  upon  the  estimate  of 
future  needs,  determined  by  statistical  data. 

Statistics  point  out  also  the  extent  of  undesirable  con- 
sumption. The  wastefulness  of  consuming  liquor,  as 
shown  by  statistics,  was  probably  the  most  forceful  factor 
that  brought  prohibition.  Statistics  are  a  guide  for  wise 
consumption,  as  well  as  a  warning  against  undesirable 
consumption. 

The  producer  needs  the  statistics  of  consumption  to 
measure  what  people  want  and  the  amount  that  they  want. 
He  needs  also  the  statistics  of  production  to  see  how 
those  needs  are  met.  He  must  estimate  what  he  can 
expect  to  sell  next  year  on  the  basis  of  consumption  and 
production  this  year.  He  can  measure  needs  more  accu- 
rately still  if  he  has  the  statistics  of  consumption  and 
production  for  a  number  of  years.  By  such  means  he 
can  see  the  trend  of  supply  and  demand  for  his  goods, 
without  which  production  becomes  guess-work  and  prices 
a  gamble. 

Statistics  of  consumption,  production,  and  distribution 
of  goods  are  of  such  importance  to  business  that  the 
federal  government  compiles  detailed  figures  of  farm 
production,  manufactures,  foreign  trade,  banking,  trans- 


STATISTICS  323 

portation,  wages,  and  cost  of  living.  It  is  known  annually 
how  much  of  each  of  the  farm  crops  is  produced,  how 
much  is  exi«)rte(l,  how  much  consumed,  and  how  much 
is  held  on  the  farm  or  in  storage.  A  census  of  manu- 
factures of  all  kinds  is  taken  regularly,  which  shows  the 
kinds  of  manufactures,  the  number  of  employees  in  each, 
the  amount  of  their  product,  the  amount  of  raw  material 
used,  the  amount  added  by  production,  and  similar  data. 
Many  private  business  concerns  maintain  statistical  bu- 
reaus of  their  own  for  the  purpose  of  getting  advance 
information  on  production. 

The  distribution  of  goods  requires  even  more  accurate 
statistics,  because  to  a  large  degree,  as  we  have  seen,  the 
distributors  take  the  risk  of  measuring  the  probable  market 
for  goods.  They  need  to  know  accurately  the  statistics 
of  consumption  and  production,  as  well  as  of  trade,  to 
guide  their  buying  and  selling  operations. 

Statistics  make  the  chart  to  guide  the  business  of  the 
distributor  as  well  as  of  the  original  producer.  Whole- 
sale and  retail  prices  for  periods  of  years  are  important 
guides  for  the  distributor.  He  must  take  such  statistics 
into  account,  or  he  is  to  a  great  degree  merely  taking  a 
gaml)ling  chance.  The  federal  government  collects  and 
publishes  regularly  the  statistics  of  wholesale  and  retail 
prices  and  of  imports  and  exports.  Private  agencies  also 
gather  for  their  own  use  statistics  of  retail  and  wholesale 
trade  and  prices. 

Insurance  Statistics 
No  business  is  so   fully  dependent  upon  statistics  as 
insurance.     The    whole    insurance    business    rests    upon 
probabilities    determined    by    experience.      Statistics    of 


324      ECONOMICS  AND  THE  COMMUNITY 

deaths  measure  the  probabilities  of  life.  From  such  sta- 
tistics tables  are  constructed  that  show  the  expectancy  of 
life  for  each  age  group.  These  tables  tell  how  long  people 
at  certain  ages  may  expect  to  live.  They  show  accurately 
how  many  men  at  fifty  will  live  to  be  sixty,  seventy,  or 
eighty  years  of  age.  With  these  statistics  the  insurance 
companies  can  determine  how  much  to  charge  as  a 
premium,  in  order  to  pay  certain  sums  at  death.  The 
statistics  of  fire  loss  show  the  rates  necessary  to  pay  losses 
from  fires.  The  statistics  of  accident  and  sickness  show 
the  amounts  that  must  be  charged  in  premiums  to  pay 
the  losses  from  accident  and  sickness.  Fidelity  insurance 
is  based  upon  statistics  of  loss  from  unfaithful  employees 
Automobile  insurance  is  based  upon  the  statistics  of  auto- 
mobile losses  and  of  damages  caused  by  automobiles. 
By  knowing  the  statistics  of  past  experience,  and  allowing 
for  special  reserves  to  meet  calamities,  the  insurance  man- 
agers can  fix  the  rates  necessary  to  pay  the  losses. 

Vital  Statistics 

Vital  statistics  are  sometimes  called  vital  bookkeeping, 
since  they  measure  for  a  country  the  gains  and  losses  in 
poinilalion.  Births  and  deaths  are  reported  to  the 
authorities,  and  the  figures  are  compiled  by  the  state 
departments  of  health  or  of  vital  statistics  to  show  the 
average  rates  of  births  and  deaths.  All  of  these  figures 
are  combined  by  the  United  States  Census  Bureau,  which 
compiles  annually  volumes  of  statistics  of  births  and 
deaths.  Not  all  of  the  states  provide  for  registration  of 
births  and  deaths,  and  so  the  figures  given  by  the  Census 


STATISTICS  325 

Bureau  relate  only  to  a  part  of  the  country  called  the 
registration  area.  Estimates  may  be  made  from  these 
figures  for  the  rest  of  the  country.  The  Census  Bureau 
compiles  these  figures  to  show  the  deaths  in  each  state 
and  city  by  age,  sex,  color,  causes  of  death,  and  the 
month  in  which  deaths  occur. 

Sickness  statistics  have  not  been  gathered  by  public 
officials.  We  have,  however,  a  great  deal  of  statistical 
data  to  show  the  average  amount  of  sickness  and  the 
average  length  of  each  sickness.  Some  mutual  benefit 
societies  which  pay  sickness  benefits  keep  complete  data 
of  the  sickness  rate.  Statistics  of  sickness  are  sometimes 
kept  by  age,  sex,  color,  and  occupation. 

Accident  statistics  are  gathered  in  the  same  way  by 
insurance  companies  and  benefit  societies.  Since  the 
passage  of  w^orkmen's  compensation  acts  complete  data 
have  been  kept  by  some  of  the  state  commissions  to  show 
the  extent  of  accidents  by  age  and  occupation,  the  length 
of  disability,  and  other  similar  facts. 

Agricultural  Statistics 

Carefully  prepared  statistics  of  agricultural  production 
are  compiled  by  the  government.  These  statistics  show 
the  acreage  of  each  crop,  the  total  production,  and  the 
average  production  per  acre.  Detailed  figures  are  com- 
piled month  by  month.  The  total  acreage  sowed  or 
planted  is  compiled  as  soon  as  possible,  and  the  con- 
dition of  each  crop  is  reported  monthly  by  percentages, 
thus : 


326      ECONOMICS  AND  THE  COMMUNITY 

Condition  of  the  Corn  Crop  in  the  United  States  on  the 
First  of  the  Months  Nameu,  1905-1918.* 


Year 

July 

.U<(/ust 

September 

October 

I't-rCcnt. 

PcrCcnt. 

Per  Cent. 

Per  Cent. 

1905 

87.3 

89.0 

89.5 

89.2 

igo6 

87.5 

88.0 

90.2 

90.1 

1907 

80.2 

82.8 

80.2 

78.0 

1908 

82.8 

82.5 

79-4 

77.8 

1909 

89.3 

84.4 

74.6 

73.8 

1910 

85.4 

79.3 

78.2 

80.3 

1911 

80.1 

69.6 

70.3 

70.4 

1912 

81.5 

80.0 

82.1 

82.2 

1913 

86.9 

75.8 

65.1 

65.3 

1914 

85.8 

74.8 

71.7 

72.9 

1915 

81.2 

79-5 

78.8 

79-7 

1916 

82.0 

75.3 

71-3 

71-5 

1917 

81.I 

78.8 

76.7 

75-9 

1918 

87.1 

78.5 

67.4 

68.6 

*  Year  book  of  the  Department  of  Agriculture,  1918,  page  457. 

The  reports  of  the  Agricultural  Department  are 
watched  with  keen  interest  by  business  men.  Upon  the 
percentages  each  month  an  estimate  of  probable  produc- 
tion is  made.  This  estimate  is  revised  each  month  until 
the  harvest.  Final  statistics  are  compiled  after  the  harvest 
is  completed.  Statistics  of  weather  conditions  are  also 
kept,  to  show  the  effects  u])on  total  production  of  various 
weather  conditions. 

Why  this  detailed  gathering  of  statistics  of  crops? 
Such  lal)or  is  not  undergone  merely  l>ecause  the  facts  are 
interesting.  These  facts  are  gathered  because  of  their 
value  in  preventing  speculation  in  farm  products.  Farm 
products  are  principally  sold  on  the  exchanges,  and  prices 
are  fixed  for  delivery  months  in  advance.  If  full  infor- 
mation were  not  available  the  market  would  be  subject 
to  wild  rumors  of  crop  shortage  or  abundance. 


STATISTICS  327 

Even  with  the  statistics  of  crops  painstakingly  gathered 
rumors  of  drought  or  of  crop  failures  disturb  the  market 
from  time  to  time.  So  important  a  part  does  the  collec- 
tion of  such  statistics  play  that  the  results  are  guarded 
with  extreme  care  until  completed  and  ready  for  delivery. 
A  serious  scandal  arose  a  few  years  ago  when,  through 
the  connivance  of  employees,  information  of  the  cotton 
crop  leaked  out  to  speculators  in  advance. 

Presentation  of  Statistics 

Statistics  may  be  presented  in  the  form  of  tables  or 
graphs.  The  former  is  used  as  the  simplest  method  for 
ordinary  statistics,  but  graphs  present  the  matter  more 
clearly  to  the  eye  and  are  sometimes  more  easily  under- 
stood. Presented  in  graphic  fashion  a  story  is  more 
readily  told  than  when  merely  expressed  in  tables  of 
figures.  The  example  following  shows  the  same  facts 
presented  in  a  table  and  translated  into  a  graph: 


Deaths  from   Typhoid  Fever  in   North   Yakima,   Washington, 

Before  and  After  a  Survey  of  Local  Sanitary  Conditions 

BY  THE  United  States   Public  Health   Service  in 

191 1.     Population  15,000.' 

Year  Number  of  Deaths 

1908  25 

1909  20 

1910  30 

1911  6 

1912  4 

1913  3 

1914  2 

*  Public  Health  Bulletin  No.  94,  page  19. 


U'S      ECONOMICS  AND  THE  COMMUNITY 


Deaths  from  Typhoid  Fever  in  North  Yak/ma,  Washington, 
Before  and  After  A  Survey  of  Local  Sanitary  Conditions  by 
The  U.5. Public  Health  Service  IN  /9II     Population  IS.OOO. 


I908 

I909 

I9IO 

1911 

19  12 

1913 

19  1-4- 

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IS 

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^ 

I  =  DEATHS  FROM  TYPHOID  FEVER 

U.S.  PUBLIC  HEALTH  SERVICE 


L./f.  WILO€fi 


Interpretation  of  Statistics 

Since  statistics  are  facts  expressed  in  figures  they 
should  be  interpreted  as  other  facts.  Assuming  that  the 
facts  that  go  to  make  up  the  statistics  have  been  correctly 
gathered  and  stated,  then  the  conclusions  drawn  are  similar 
to  the  conclusions  from  any  other  set  of  facts. 

It  is  often  said  that  one  can  prove  anything  by  statistics. 
This  would  be  equivalent  to  saying  that  one  could  prove 
anything  by  facts.  Obviously,  facts  will  not  prove  two 
oi)i)Osite  conclusions.  The  popular  fallacy  that  anything 
can  be  proved  by  statistics  arises  from  the  false  use  of 
figures  by  ignorant  or  dishonest  men  to  prove  their  own 
point. 


STATISTICS  329 

The  use  of  figures  to  prove  different  things  is  no  proof 
that  statistics  can  be  used  to  prove  anything.  Clear 
thinking  is  necessary  to  determine  whether  figures  are 
really  statistics.  Logical  reasoning  is  necessary  to  deter- 
mine the  truth  or  falsity  of  tables  of  figures  which  some- 
times pass  for  statistics,  just  the  same  as  logical  thinking 
is  necessary  to  determine  the  truth  or  falsity  of  any 
statement. 

Index  Nujjibers 

Statistics  are  used  to  measure  economic  and  social  con- 
ditions. The  question  arises  as  to  the  correctness  of  any 
one  set  of  figures  in  such  measurements.  A  man  might 
buy  a  suit  of  clothes,  and  find  that  suits  had  advanced  five 
dollars  in  price.  He  might  conclude  from  that  that  the 
cost  of  living  had  gone  up,  when,  perhaps,  if  he  had 
bought  shoes,  he  would  have  found  that  the  price  of  shoes 
had  gone  down.  The  producer  might  find  that  a  par- 
ticular brand  of  candy  had  gone  up  in  price.  His  con- 
clusion that  the  cost  of  living  had  risen  would  not  be  valid 
if  it  were  found  at  the  same  time  that  the  price  of  flour 
had  gone  down.  Prices  of  goods  fluctuate — some  going 
up,  some  remaining  constant,  and  some  declining  in  price. 

To  get  a  fair  idea  of  the  increase  or  decrease  of  the 
cost  of  living  it  is  necessary  to  bring  together  the  prices 
of  a  number  of  articles  to  see  what  is  the  whole  tendency. 
It  is  necessary  in  the  group  of  articles  we  have  selected 
to  give  proper  weight  to  the  most  important  articles. 
Food  is  more  important  than  furs :  therefore  it  should 
have  a  more  important  place  in  the  group. 

In  using  index  numbers  several  commodities  are 
grouped,    giving   due   weight    to    each,   and    thereby    the 


330      ECONOMICS  AND  THE  COMMUNITY 

chang^es  that  take  place  in  price  are  shown.  Index  num- 
bers are  like  the  weights  of  subjects  in  a  civil  service 
examination,  where  subjects  are  given  weights  according 
to  their  imi)ortance  in  the  particular  position  for  which 
examinations  are  held. 

Averages 

Statistics  are  generally  expressed  in  averages.  The 
average  of  the  numbers  15,  17,  and  28  is  merely  the  sum 
of  those  numbers  divided  by  3.  The  average  of  10,  12, 
5,  9.  and  14  equals  the  sum  divided  by  5.  If  a  thousand 
men  receive  an  aggregate  of  $200,000,  the  average  wage 
is  $2,000  per  man.  The  average  is  found  by  dividing  the 
sum  of  the  items  by  the  number  of  items. 

Some  confusion  is  observed  when  the  attempt  is  made 
to  average  two  or  more  groups.  For  instance,  what  is 
the  average  of  the  two  groups  of  figures  above?  One 
might  say  that  it  would  be  20  plus  10  divided  by  2  or  15. 
Closer  observation,  however,  shows  that  there  are  five 
items  in  the  one  group  and  only  three  in  the  other.  The 
second  group,  being  larger,  should  be  given  a  greater 
weight.     We  give  greater  weight  to  each  item,  thus: 

20  Cthe  average  of  the  first  group)         X  3  ^=    60 
10  (the  average  of  the  second  group)     X  5  ^^    50 

no 
50  +  60  is  no;  divide  by  the  number  of  items,  8, 
and  we  have  the  correct  average:    13^4- 

Which  is  the  same  result  we  would  have  secured  if  we 
had  added  the  eight  items  together  and  divided  by  eight. 
This  is  known  as  the  weighted  average. 

The  average  should  be  used  carefully,  otherwise  it  may 


STATISTICS  331 

be  misleading.  If  one  man  receives  $100,000  income, 
and  ten  men  receive  $2,000,  and  fifty  men  receive  $800, 
the  average  income  would  be  $2,623.  U^is  would  be 
misleading,  because  the  greater  number  of  men  received 
only  $800.  One  might  conclude  that  the  workers  were 
very  prosperous,  when  as  a  matter  of  fact  the  average 
wage  for  most  of  the  workers  would  be  extremely  low. 
To  give  a  more  exact  statement,  items  are  grouped  and 
the  average  is  found  for  each  group. 

Questions  and  Problems 

1.  Describe  the  importance  of  statistics  to  the  manufac- 

turer, the  importer,  the  statesman. 

2.  How  do  agricultural  statistics  help  to  prevent  specu- 

lation ? 

3.  Of  what  value  is  it  to  know  how  much  raw  material 

and  how  much  labor  go  into  manufactured  products? 

4.  Work  out  some  original  examples  of  averages,  such  as 

the  average  production  of  crops,  the  average  wages, 
or  average  school  attendance,  for  all  or  part  of  your 
community. 

5.  Examine  the  newspapers  and  the  farm  papers  for  esti- 

mates of  production  of  crops  or  other  goods,  and 
compare  from  time  to  time. 

6.  What  is  the  value  of  index  numbers  in  figuring  the  cost 

of  living? 

7.  Prepare  a  table  of  prices  of  the  things  used  in  the 

home,  giving  your  estimate  of  the  weight  that  should 
be  given  to  each  article. 

8.  Show  how  the  average  in  statistics  may  be  misleading. 

9.  Examine    the   reports   of    statistics   of    manufacturers 

compiled  by  the  United  States  Census  Bureau  to  see 
the  kind  of  facts  reported.  Also  the  agricultural 
growth,  compiled  by  the  United  States  Department 
of  Agriculture.  Also  the  volumes  on  mortality  and 
birth  statistics,  compiled  by  the  United  States  Census 
Bureau. 


332       ECONOMICS  AND  THE  COMMUNITY 

References  for  Further  Study 

Secrist,  Introduction  to  Statistical  Method. 

\\'hipple,  J'ital  Statistics. 

Davies,  Introduction  to  Economic  Statistics. 

United  States  Census  Bureau,  Statistics  of  Manufacturers. 

United  States  Census  Bureau.  Mortality  Statistics. 

United  States  Census  Bureau,  Birth  Statistics. 

United  States  Department  of  Agriculture,  Agricultural 
Year  Book. 

United  States  Department  of  Commerce,  Statistical  Year 
Book. 

United  States  Bureau  of  Labor  Statistics,  Monthly  Re- 
view. 


CHAPTER  XXII 

SOCIAL    CONTROL 

Community  Survey 

1.  Make  a  list  of  the  things  which  your  community  is 

doing  for  the  citizen. 

2.  Make  a  Hst  of  the  things  it  is  not  doing  which  it  might 

do  with  advantage. 

It  is  clear  from  the  discussion  in  the  foregoing  chapters 
that  the  processes  of  production  and  distribution,  by  which 
the  essential  needs  are  supplied,  should  be  made  to  work 
as  smoothly  and  eflfectively  as  possible. 

The  object  of  production  and  distribution  is  to  supply 
human  wants.  Goods  are  manufactured,  transported,  and 
distributed  because  human  beings  have  wants  that  they 
seek  to  satisfy.  Production  and  distribution  do  not  exist 
for  the  special  profit  of  any  group,  but  for  the  welfare 
of  all.  The  highest  aim  of  a  people  should  be  to  make 
the  processes  of  trade  as  direct  and  simple  as  possible  in 
order  that  the  consumer  may  be  supplied  more  readily 
with  the  necessaries  and  the  comforts  of  life.  Democratic 
principles  demand  the  greatest  good  to  the  greatest 
number. 

Some  people  believe  in  the  doctrine  that  the  government 
should  keep  its  hands  ofif  of  the  processes  of  production 
and  distribution.  The  governments  of  many  countries 
acted  almost  entirely  on  that  principle   for  many  years. 

333 


334       KCOXOIMICS  AND  THE  COMMUNITY 

This  doctrine  is  known  as  the  laissca-faire  doctrine,  or 
the  "let-alone"  doctrine.  Under  it  the  government  would 
leave  business  and  trade  alone,  and  confine  itself  to  the 
preservation  of  peace  and  order,  defending  the  country 
against  invasion  and  punishing  criminals. 
Opposed  to  this  doctrine  is  the  idea  that  government,  as 


How  the  state  serves  industry.     New  York  State  School  of  clay 
working  and  ceramics  at  Alfred   University 

the  agent  of  the  people,  should  take  counsel  for  the  wel- 
fare of  all,  and  should  not  only  preserve  peace  and  order 
but  should  see  that  the  rules  of  the  game  are  so  made 
and  interpreted  that  the  greatest  good  will  be  secured  for 
the  greatest  number.  Those  who  follow  this  floctrine 
Ijelieve  that  in  the  complex  business  relations,  without  the 
enforcement  of  protective  measures  by  the  community, 
the  strong  and  crafty  will  oppress  the  weak  in  many  ways. 


SOCIAL  CONTROL  335 

An  illustration  will  show  the  different  points  of  view. 
There  used  to  be  an  old  dcKtrine  of  trade  which  cleclared 
that  the  buyer  must  look  out  for  himself.  "Let  the 
buyer  beware,"  was  the  statement  of  this  doctrine.  Fraud 
on  the  i)art  of  the  seller  was  no  concern  of  the  community. 
The  buyer  must  stand  the  loss  if  he  allowed  himself  to 
be  cheated. 

When  commodities  were  few  and  business  transactions 
simple,  this  doctrine  did  not  bring  serious  hardships,  but 
it  did  give  the  crafty  and  clever  advantages  over  the 
average  man.  Even  yet  we  see  examples  of  the  doctrine 
in  transactions  such  as  horse-trades.  The  buyer  must 
beware.  lie  is  responsible  if  he  buys  a  horse  suffering 
from  visible  defects. 

In  these  times,  however,  conditions  are  changed.  Not 
all  goods  are  simple  commodities.  Many  are  made  up 
of  varieties  of  products  and  qualities.  Such  products  as 
wheat,  potatoes,  corn,  and  vegetables  can  still  be  judged 
by  the  eye  as  to  their  quality.  Not  so  with  manufactured 
foods,  fabrics,  and  furniture,  and  the  thousands  of  prod- 
ucts of  modern  skill  and  science.  The  purchaser  stands 
helpless  when  purchasing  adulterated  foods,  drink,  drugs, 
fertilizer,  cattle  feed,  petroleum,  gas,  and  other  products. 
He  can  not  analyze  these  products ;  that  must  be  done  by 
scientists  in  laboratories.  So  comes  the  need  for  govern- 
ment interference  to  protect  the  purchaser  against  cheating 
in  quality  and  quantity  of  goods.  Laws  are  passed  regu- 
lating weights,  measures,  and  qualities,  and  testing  lab- 
oratories are  maintained  to  enforce  the  laws. 

The  old  idea  of  economics  was  that  there  were  fixed 
laws  of  business  and  trade,  which  could  not  be  changed. 


336      ECONOMICS  AND  THE  COMMUNITY 

Hardships  might  come  to  some,  but  that  was  inevitable. 
This  idea  gave  the  name  of  the  "dismal  science"  to  eco- 
nomics. It  was  a  creed  of  hopelessness.  "Things  are 
as  they  are,  and  bad  results  cannot  be  helped,"  was  the 
bald  statement  of  it. 

Modern  economics,  while  recognizing  certain  natural 
laws  which  are  fixed  and  unchangeable,  champions  the 


i'ure-ljrfd   corn,   symbol   of   scientific   agriculture 

doctrine  that  the  instruments  of  business  may  be  so  regu- 
lated as  to  prevent  the  oppression  of  the  weak  by  the 
strong  and  the  exploiting  of  the  many  by  the  few.  It 
extends  the  doctrine  so  far  as  to  interfere  with  such  time- 
honored  ideas  as  the  working  of  supply  and  demand. 
During  the  great  war  the  United  States  deliberately  sup- 
pressed the  production  of  non-essential  goods  and  pro- 
moted   the    production    of    essentials    on    a    large    scale. 


SOCIAL  CONTROL  337 

Price-fixing  was  common.  In  many  ways  governments 
are  doing  the  same  thing  with  (Hfferent  products — fixing 
prices,  stimulating,  curtaihng,  or  regulating  production. 

Stability  of  Conditions 

The  first  essential  to  the  harmonious  workings  of  the 
processes  of  production  and  distribution  is  that  order 
shall  prevail.  Processes  of  trade  can  not  l^e  conducted 
where  disorder  reigns.  Countries  in  which  revolutions 
occur  are  notoriously  backward  in  economic  development. 
Men  will  not  strive  to  build  up  industries  or  commerce 
unless  they  are  reasonably  secure  in  the  possession  of  their 
property  and  their  lives.  Men  will  not  strive  to  acquire 
property  or  be  willing  to  risk  investment  where  there  is 
danger  of  destruction  by  bandits  or  confiscation  by  corrupt 
governments.  In  the  present  state  of  the  world  there  are 
many  illustrations  to  prove  that  a  stable  government, 
honestly  administered  for  the  protection  of  lives  and 
property,  is  the  first  essential  of  economic  progress. 

Enforconcnt  of  Contracts 

Business  is  built  on  confidence  that  men  will  keep  their 
word  and  fulfil  their  agreements.  Although  reliance 
must  be  placed  in  the  honor  of  men,  yet  an  essential  to 
economic  progress  is  the  impartial  enforcement  of  con- 
tracts and  other  obligations  by  legal  action.  If  men  could 
not  enforce  their  personal  and  property  rights,  chaos 
would  reign.  No  one  would  undertake  business  enter- 
prises unless  he  could  lawfully  enforce  the  collection  of 
debts  and  the  fulfilment  of  agreements.  Credit  could  not 
be  secured  if  the  laws  and  the  courts  did  not  offer  a  way 


338      ECONOMICS  AND  THE  COMMUNITY 

to  enforce  collection.  The  cornerstone  of  business  is  built 
on  the  assurance  that  the  laws,  courts,  and  public  officers 
will  compel  men  to  meet  their  honest  obligations  where 
thev  fail  or  refuse  to  do  so. 


law.  wff^a-tFBf         Mmm  1  l» 


The  Gatun  locks  of  the  Panama  Canal 

Facilitating  Business 

There  are  many  acts  of  government  performed  to  aid 
business  which  are  pretty  generally  accepted  as  good  policy. 
The  coinage  and  regulation  of  money  as  a  medium  of 
exchange  and  standard  of  value  is  everywhere  recognized 
as  a  governmental  function.  Money  is  used  primarily  to 
promote  business  transactions  by  enabling  every  man  to 
supply  his  needs.  Any  private  system  of  money  would 
be  considered  intolerable.     Anything  but  a  uniform  na- 


SOCIAL  CONTROL  339 

tional  system  of  money  would  be  a  nuisance  to  the  people 
and  to  business. 

The  fixing  of  standards  of  weights  and  measures  by 
the  government  is  also  a  long  recognized  principle.  Lately 
it  is  being  recognized  that  standards  of  quality  of  many 
kinds  of  goods  must  also  be  fixed  by  the  government  for 
the  protection  of  the  consumer  against  subtle  forms  of 
fraud. 

Provision  for  transportation  and  storage  where  such 
facilities  are  lacking,  and  the  regulation  of  all  private 
systems  of  transportation  and  storage,  are  pretty  generally 
supported  at  this  time.  The  states  built  the  canals  to 
develop  and  assist  trade.  The  national  government  gave 
large  grants  of  land  to  the  builders  of  the  transcontinental 
railroads  to  open  up  the  trade  of  the  continent.  The 
national  government  built  the  Panama  Canal  and  is  build- 
ing the  Alaskan  Railway  to  promote  trade.  The  national 
government  has  dredged  and  built  harbors,  made  rivers 
navigable,  supported  lighthouses  and  coast  guard  service, 
and  built  merchant-ships,  primarily  to  promote  and  pro- 
tect trade.  The  post-ofltice  is  the  most  important  of  all 
the  government  agencies  conducted  to  aid  business. 

State  and  local  governments  have  built  roads  and 
bridges.  Cities  have  developed  transportation,  lighting 
and  power  systems,  water  supplies,  housing,  and  railroads, 
in  order  to  further  industrial  development.  These  are 
merely  examples  of  the  way  in  which  aid  is  given  to 
facilitate  the  processes  of  production  and  distribution  to 
meet  the  needs  of  the  consumer  and  make  it  possible  for 
him  to  enjoy  more  and  more  of  the  satisfaction  of  life. 


340      ECONOMICS  AND  THE  COMMUNITY 

Regulating  Private  Business 

The  great  majority  of  the  agencies  that  facilitate  the 
transaction  of  business,  including  railroads,  steamship 
lines,  telegraph  and  telephone  systems,  terminal  elevators, 
and  warehouses,  are  in  private  hands,  and  the  consumers 
are  dependent  upon  private  owners  for  the  carrying  on  of 
business  upon  which  the  satisfaction  of  their  needs  and 
wants  depend. 

It  was  recognized  long  ago  that  the  systems  of  trans- 
portation and  distribution  of  people's  necessities  were  too 
important  to  be  left  entirely  to  private  owners.  Greed 
and  injustice  were  too  prevalent.  It  was  conceived  that 
the  mass  of  the  people  ought  not  to  be  compelled  to  pay 
unnecessary  tribute  to  those  who  held  control  of  the 
arteries  of  business  life. 

Beginning  in  the  decade  of  the  seventies  a  movement 
for  the  regulation  of  railroads  and  grain  warehouses 
spread  rapidly  over  the  country.  The  Supreme  Court  of 
the  United  States  upheld  the  idea  that  when  private 
owners  engage  in  the  business  of  supplying  a  public 
necessity  they  are  subject  to  regulation.  The  court  said: 
"When  one  devotes  his  property  to  a  use  in  which  the 
public  has  an  interest,  he  in  effect  grants  to  the  public  an 
interest  in  that  use,  and  must  submit  to  be  controlled  by 
the  public  for  common  good.'' 

That  principle  has  been  followed  ever  since.  To-day 
there  are  innumerable  laws  regulating  railways  and  ware- 
houses, and  there  are  commissions  in  every  state,  besides 
the  Interstate  Commerce  Commission,  to  regulate  the 
charges  and  service  of  the  railways. 

Shortly  after  1900  an  era  of  regulation  of  rates  and 


SOCIAL  CONTROL  341 

service  of  street  railways,  gas,  electric-light,  water,  and 
power  companies  by  state  public  utilities  commissions 
began.  Nearly  all  of  the  states  now  have  such  com- 
missions. 

In  every  case  the  beginnings  of  regulation  of  railroads, 
public  utilities,  and  similar  business  has  resulted  in  the 
necessity  for  extension.  One  regulation  led  to  another. 
It  was  first  thought  that  the  fixing  of  rates  would  protect 
the  consumer.  But  when  the  rate  was  fixed  the  quality 
or  service  was  reduced,  or  wages  of  men  were  lowered. 
It  became  necessary  to  fix  standards  of  service  as  well  as 
rates,  and  to  struggle  with  the  problem  of  protecting 
labor  against  unfair  wage  cuts.  These  problems  carried 
regulation  into  the  intricacies  of  the  business,  including 
the  capitalization,  valuation,  and  accounting.  The  whole 
range  of  the  business  became  of  necessity  subject  to 
supervision.  Many  people  have  come  to  believe  that  the 
only  escape  from  the  difficulties  of  regulation  is  public 
ownership.  Others  believe  that  when  regulation  becomes 
fully  effective  the  benefits  of  private  management  will  be 
retained  and  the  advantages  of  public  ownership  will  be 
secured. 

No  one  doubts  the  necessity  for  such  government  regu- 
lation or  ownership  as  will  prevent  the  monopoly  of  any 
necessary  product  or  service.  The  day  has  long  passed 
when  the  people  will  tolerate  silently  the  enrichment  of 
a  few  who  control  a  necessity  or  comfort  of  life.  While 
such  control  is  sometimes  grasped  by  private  interests,  it 
is  soon  destroyed  by  regulation  or  public  ownership. 
Difficulties  are  encountered,  and  it  sometimes  takes  time 
to  overcome  a  private  monopoly,  but  the  spirit  of  a  demo- 


342      ECONOMICS  AND  THE  COMMUNITY 

cratic  people  will  not  tolerate  private  monopoly,  and  their 
genius  can  be  depended  upon  to  eradicate  it  wherever  it 
shows  itself. 

Likewise  it  is  clearly  recognized  that  unfair  practices, 
which  give  advantages  to  some  that  are  not  enjoyed  by 
all,  are  intolerable.  It  is  the  clear  purpose  of  the  people 
to  see  that  all  are  treated  alike  and  that  special  privileges 
are  given  to  none. 

Not  long  ago  railroads  gave  lower  rates  to  some  ship- 
pers than  to  others.  Then  they  covered  up  such  practices 
by  charging  the  same  rate  and  rebating  a  part  to  favorites. 
Some  monopolies  were  given  their  power  through  the 
advantage  they  received  in  rebates  from  the  railroads. 
The  people  were  thus  cheated  for  the  advantage  of  a  few. 
The  practice  could  not  be  tolerated,  and  it  was  stopped 
when  the  facts  became  known  and  the  successful  method 
of  control  was  made  clear. 

There  is  developing  an  idea  that  all  price  discrimina- 
tions are  wrong  and  that  free  passes  and  services  are 
socially  unfair.  The  uniform  price  idea  appears  more 
democratic.  It  also  encourages  honest  business.  When 
one  consumer  or  dealer  is  charged  more  than  another  for 
the  same  goods  he  is  being  so  charged  for  the  benefit  of 
the  other.  If  a  dealer  makes  a  rebate  to  one  customer 
he  generally  overcharges  others.  When  a  free  pass  is 
given  to  the  theater  it  must  in  the  long  run  be  paid  by 
those  who  pay  for  their  seats.  People  find  it  hard  to  see 
the  justice  of  being  charged  an  excess  amount  for  the 
purpose  of  giving  free  service  to  others. 

The  people,  acting  through  their  governments,  will  un- 
doubtedly take  an  increasingly  large  part  in  keeping  the 


SOCIAL  CONTROL  343 

processes  and  channels  of  production  and  distribution  free 
from  unfair  practices,  discriminations,  and  excessive  tolls 
and  profits. 

The  channels  for  the  stream  of  goods  from  producer 
to  consumer  should  be  kept  clear  of  all  unnecessary 
obstructions.  The  promotion  of  this  ideal  is  recognized 
as  a  public  function. 

Regulation  of  Special  Business  Activities 

The  regulation  of  corporations,  banks,  and  insurance 
by  the  government  is  completely  accepted  by  all  thinking 
men.  These  businesses  bear  so  close  a  relation  to  the 
people  as  to  require  the  closest  supervision  in  order  that 
the  benefits  of  these  institutions  shall  reach  all  of  the 
people. 

Corporations 

The  corporation  is  the  form  of  organization  under 
which  the  bulk  of  business  is  carried  on.  The  state 
creates  the  corporation  and  gives  it  power.  The  state 
must,  therefore,  control  it,  so  that  its  power  shall  not  be 
used  to  the  public  detriment. 

The  corporation  is  necessary  in  modern  business  as  a 
means  of  securing  capital  for  large  enterprises  and  of 
organizing  the  processes  of  production  and  distribution. 
Unfortunately,  corporate  organization  offers  opportunities 
for  adventurers  and  manipulators  to  collect  money  by  the 
sale  of  stock,  issue  watered  stock,  grant  excessive  amounts 
of  stock  to  themselves  as  a  bonus  for  promotion,  and 
finally  leave  the  innocent  purchasers  to  stand  the  loss 
while  the  manipulators  escape. 

Public  control  of  corporations  should  extend  from  their 


344      FXONOMICS  AND  THE  COMMUNITY 

organization  to  their  dissolution.  Safeguards  should  be 
provided  to  lessen  the  evils  in  the  organization  of  cor- 
porations; to  prevent  the  issue  of  watered  stock  and  of 
excessive  bonuses  to  promoters;  to  protect  the  innocent 
investor ;  to  see  that  corporations  are  democratically  man- 
aged ;  and  to  protect  the  rights  of  creditors  and  investors 
if  the  corporation  fails  and  goes  into  the  hands  of  a 
receiver. 

Banking 

The  supervision  of  banking  by  the  government  has 
been  accepted  as  good  policy  for  many  years.  The  bank 
holds  a  special  position  of  trust  and  responsibility  in  the 
community.  The  people  deposit  their  money  in  it  for 
safe-keeping,  and  are  entitled  to  draw  it  out  when  needed. 
The  bank  creates  credit  upon  the  basis  of  the  money  of 
the  depositors,  and  makes  loans  for  business  purposes. 
It  is  important  that  banks  create  credit  and  make  Joans 
carefully,  and  that  they  conduct  their  business  so  as  to 
be  able  to  meet  all  of  the  withdrawals  of  depositors. 

The  temptation  to  manipulate  the  money  of  depositors 
by  creating  excessive  credits,  making  loans  to  favorites 
or  for  personal  purposes  or  on  unsound  security,  is  too 
great  to  be  left  entirely  in  the  hands  of  men  without 
public  control.  Banks  do  not  exist  to  aid  a  favored  few. 
They  are  public  institutions  for  the  benefit  of  all.  Their 
safety  must  be  safeguarded,  and  fair  treatment  of  all 
without  favoritism  must  be  assured.  Otherwise  this  very 
essential  business  might  l>e  used  to  benefit  and  strengthen 
the  few  to  the  detriment  of  the  many.  The  bankers  hold 
control  of  the  life  blood  of  business  of  any  community. 


SOCIAL  CONTROL  345 

No  one  can  be  permitted  to  use  that  power  to  oppress 
some  or  give  special  benefit  to  others. 

The  need  for  public  c(jntrol  of  banking  is  especially 
necessary  to  prevent  too  great  an  extension  of  credit,  and 
also  to  prevent  the  concentration  of  money  and  credit  at 
money  centers.  When  such  concentration  occurs  money 
becomes  monopolized  by  the  bankers  of  those  centers. 
They  thereby  hold  a  large  degree  of  control  of  the  activ- 
ities of  the  rest  of  the  country.  To  offset  the  danger  of 
concentration  the  Federal  Reserve  Banking  Act  divided 
the  country  into  twelve  districts,  with  a  central  reserve 
bank  in  each.  This  tends  to  break  up  the  control  by  one 
city,  and  makes  bank  credit  more  readily  available  over 
the  country  at  all  times. 

Again,  as  in  all  public  control,  the  banks  are  regulated 
to  facilitate  business  and  trade  and  to  see  that  the  life 
blood  of  business  and  trade  flows  freely. 

Insuratice 

The  business  of  insurance  is  conducted  on  a  promise 
by  the  insurer  of  future  fulfilment  of  agreement  with  the 
insured.  In  return  for  a  premium  the  insurance  company 
guarantees  that  if  in  the  future  certain  contingencies 
happen  to  the  insured  in  the  way  of  losses,  the  insurance 
company  will  pay  certain  sums  to  the  insured.  Permanent 
stability  is  essential  on  the  part  of  an  insurance  company 
to  protect  the  policy-holder.  Not  only  must  the  present 
interest  of  the  policy-holder  be  protected,  but  also  his 
future  interests  when  the  obligation  of  the  insurance 
company  shall  mature.  The  man  who  insures  his  life  at 
twenty  years  of  age  must  be  assured  that  at  his  death 


346      ECONOMICS  AND  THE  COMMUNITY 

fifty  years  or  more  later  the  insurance  company  will  be 
able  to  meet  its  obligation  to  his  dependents. 

Sound  business  principles  and  practices  are  prime 
essentials  in  the  insurance  business.  No  other  business 
is  projected  so  far  into  the  future  as  the  life  insurance 
business.  Contracts  entered  into  by  life  insurance  com- 
panies may  not  mature  for  three-quarters  of  a  century 
or  more.  This  fact  alone  would  be  sufficient  to  prove  the 
necessity  of  public  control.  The  public  has  a  special 
interest  in  such  a  matter,  aside  from  the  promotion  of 
business  stability.  Life  insurance  is  primarily  for  the 
protection  of  dependents,  and  in  this  the  public  has  a 
particular  interest  to  see  that  the  protection  which  was 
designed  and  paid  for  shall  be  assured. 

Insurance  control  by  the  state  extends  properly  to  the 
prevention  of  unsound  insurance  schemes ;  the  regulation 
of  incorporation  of  insurance  companies;  the  establish- 
ment of  fair  but  adequate  rates  of  premium;  the  preven- 
tion of  unsound  practices;  the  safe  investment  of  funds; 
and  the  prevention  of  manipulation  of  the  vast  funds  held 
to  redeem  obligations  in  the  future.  Insurance  is  of  such 
importance  as  an  aid  in  the  promotion  of  economic  and 
social  stability  as  to  warrant  social  action  in  its  promotion 
either  as  a  private  or  public  function. 

Conservation  of  Resources 

The  conservation  of  resources  is  a  public  function  the 
performance  of  which  has  long  been  neglected.  Great 
waste  of  natural  stores  of  goods  has  taken  place,  and  we 
are  approaching  the  time  when  some  of  the  resources 
upon  which  we  now  depend  will  be  exhausted.     The  waste 


SOCIAL  CONTROL  347 

that  has  taken  place  can  not  be  repaired,  but  what  is  left 
may  be  safeguarded,  and  the  substitutes  and  new  resources 
discovered  by  science  may  Ije  kept  from  the  shameless 
waste  of  other  resources  in  tlie  past. 

Individual  action  can  not  be  relied  upon  to  prevent 
waste  of  natural  resources.  The  lure  of  profits  inevitably 
causes  the  individual  to  take  the  largest  immediate  return, 
without  regard  to  future  supplies.  Social  control  is 
necessary  to  prevent  waste  and  to  safeguard  the  rights 
of  the  present  and  future  generations. 

Not  only  is  this  true  with  respect  to  the  resources  of 
field,  forest,  and  mine,  but  also  to  the  resources  of  man- 
fKDwer.  It  is  of  small  consequence  that  wealth  increases 
if  men  decay.  An  organized  society  will,  therefore,  place 
safeguards  around  its  children  to  promote  strong  bodies 
and  minds,  and  safeguard  the  adults  throughout  life  by 
proper  provisions  for  health  and  safety,  and  by  provisions 
for  the  fullest  development  of  human  capacity  through 
education  suited  to  the  needs  of  all. 

Essential  and  A^ on-Essential  Production 

One  of  the  lessons  that  the  war  taught  to  all  countries 
was  the  need  for  special  promotion  of  production  of 
essential  goods.  Left  to  itself,  industry  will  develop  in 
those  fields  that  offer  the  largest  profits.  When  the  largest 
profits  are  to  be  had  in  the  production  of  non-essential 
goods,  capital,  labor,  and  raw  materials  will  be  drawn  into 
the  production  of  non-essential  goods  and  away  from  the 
production  of  essential  goods.  If  it  were  easy  for  indus- 
try to  shift  from  the  one  to  the  other  we  would  expect 
that,  as  industry  withdrew  from  the  production  of  essential 


34!^      ECONOMICS  AND  THE  COMMUNITY 

goods,  prices  would  rise  and  industry  would  be  thereby 
invited  back  into  the  field  of  the  production  of  essential 
goods. 

But  industry  can  not  shift  readily.  The  automobile 
factory  can  not  be  turned  into  a  clothing  or  food  factory. 
Capital  invested  in  the  manufacture  of  chewing  gum  can 
not  be  readily  transferred  to  the  promotion  of  agriculture. 
Men  drawn  from  the  farms,  forests,  and  mines  into  non- 
essential industries  do  not  readily  go  back  to  their  former 
occupations. 

There  has  been  a  great  shift  of  workers  and  capital 
from  essential  into  non-essential  industries  in  the  last  few 
years.  The  situation  has  grown  so  serious  that  public 
action  has  been  deemed  necessary  to  turn  the  productive 
agents  back  into  the  production  of  essential  goods.  Spe- 
cial efforts  have  been  made  to  promote  certain  industries, 
and  special  restrictions  have  been  placed  upon  industries 
that  provide  luxuries.  Heavy  taxes  have  been  levied 
upon  luxuries  to  discourage  their  production,  and  during 
the  year  1920  the  banks  entered  into  a  plan,  approved  by 
the  Federal  Reserve  Board,  to  discourage  loans  in  aid  of 
non-essential  industries,  in  order.to  turn  the  money  of  the 
country  toward  the  production  of  essential  goods. 

The  problem  of  encouraging  production  of  the  neces- 
saries of  life  will  doul)tless  continue  for  some  time  in  our 
economic  and  political  life. 

Stabilising  Industry 

The  serious  losses  and  hardships  that  come  to  all  classes 
when  there  is  a  suspension  of  industrial  activities  calls  for 
the  careful  thought  of  those  who  guide  our  communities. 


SOCIAL  CONTROL  349 

When  production  is  uncertain,  now  running  overtime  and 
again  suspending  entirely  because  of  overproduction,  the 
individual  who  depends  upon  regular  emi)loyment  for  his 
living  suffers  untold  miseries.  The  uncertainties  of 
employment  cast  a  cloud  over  the  life  of  every  honest 
wage-earner  and  his  family.  The  cominuiiity  should  find 
safeguards  against  the  calamities  of  suspension  of  industry 
and  unemployment.  This  can  l)e  done,  to  some  extent 
at  least,  by  obtaining  accurate  statistics  of  production  for 
the  guidance  of  producers,  and  by  providing  a  program  of 
public  work  for  several  years  in  advance,  so  that  as  private 
industry  slackens  the  public  work  may  absorb  the  workers, 
and  as  private  industry  increases  the  public  demands  may 
decrease.  By  holding  great  projects  of  public  work  in 
reserve,  industry  may  be  kept  going  and  unemployment 
be  prevented. 

The  stability  of  agricultural  production  should  also  be 
specially  promoted  by  the  community.  The  uncertainties 
in  agriculture  are  depressing.  The  farmer  can  not  tell 
whether  his  crop  is  to  be  large  or  small,  or  whether  the 
price  is  to  be  above  or  below  the  cost  of  production. 
Farm  products  are  thrown  on  the  market  for  what  they 
will  bring ;  the  farmer  has  been  practically  dependent  upon 
produce  speculators  for  the  disposal  of  his  crop. 

Many  measures  have  been  suggested  to  remedy  the 
present  evils.  Any  remedy  that  tends  to  stabilize  pro- 
duction and  equalize  the  flow  of  products  to  market  will 
improve  the  present  conditions.  Increased  storage  facili- 
ties and  financial  credit  based  upon  warehouse  receipts ; 
public  and  cooperative  industries  to  utilize  or  preserve 
surplus  products;  close  regulation  of  grain  and  produce 


350       ECONOMICS  AND  THE  COMMUNITY 

exchanges ;  cooperative  marketing,  including  foreign  ex- 
port provisions ;  and  accurate  farm  and  crop  statistics — 
all  will  aid  in  stabilizing  agriculture.  Uniformly  fair 
prices  year  after  year  are  to  be  preferred  to  the  fluctua- 
tions that  are  the  bane  of  the  present  system. 

Research  and  Statist'ics 
One  of  the  most  effective  ways  to  stimulate  business 
and  trade  is  lo  provide  all  of  the  knowledge  and   facts 
available  for  their  guidance.     A  few  large  and  powerful 


Dctermiiiinff  the  best  clayworkiiig  practice  in  the  laboratory  and 
workshop.  New  York  State  School  of  Ceramics,  Alfred  Uni- 
versity 

concerns  can  do  this  for  themselves ;  the  small  ones  can 
not.  and  are  thus  handicapi)ed  in  competition.  Labora- 
tories for  research  in  methods  and  materials  are  essentials 
in  all  industries,  based  upon  scientific  principles.  Research 
into  the  scientific  literature  of  all  countries  is  needed  to 


SOCIAL  CONTROL 


351 


brinp  to  our  managers  the  l^cst  experience  on  given  prob- 
lems. Public  support  of  such  lalx)ratories  and  research 
brings  to  all  the  benefits  of  the  scientific  knowledge  of 
the  world. 

We  do  not  have  as  extensive  a  development  of  such 
scientific  bureaus  in  this  country  as  the  European  countries 


Books  to  aid  business 

formerly  provided ;  but  the  idea  is  approved,  and  manu- 
facturers in  many  lines  can  call  into  their  service  the 
facilities  of  public  laboratories  in  solving  difficult  prob- 
lems. The  state  universities  particularly  supply  many 
kinds  of  testing  and  experimental  laboratories,  while  the 
Bureau  of  Standards  at  Washington  is  serving  broadly 
the  purposes  of  business  by  its  scientific  investigations  and 
conclusions.  Many  cities  are  supporting  libraries  of  busi- 
ness literature  to  help  solve  business  problems. 

The  collection  of  statistics  is  also  regarded  as  a  public 
function  necessary  to  guide  business  activities.     Millions 


352       ECONOMICS  AND  THE  COMMUNITY 


A  corner  in  the  business  branch  of  the  Indianapolis  Public  Library 

of  dollars  are  spent  in  such  work  by  state  and  national 
governments.  Statistics  provide  a  compass  without  which 
business  would  be  groping  in  the  dark.  Statistics  consti- 
tute an  inventory  as  important  in  the  business  life  of  the 
nation  as  the  inventory  of  the  business  man  is  to  him. 


Clear  Economic  Vision 

There  is  need  for  the  study  of  economic  questions  by 
every  citizen  of  the  country.     Many  economic  problems 


SOCIAL  CONTROL  353 

come  up  for  discussion  and  action  in  political  campaigns, 
in  legislative  halls,  and  governmental  departments.  In 
the  long  run,  many  of  the  most  delicate  economic  questions 
are  settled  by  the  voice  of  the  people,  either  through  the 
election  of  officers  committed  to  one  policy  or  another, 
or  by  direct  vote  on  question?  submitted  to  the  voters  in 
the  form  of  constitutional  amendments,  or  laws  submitted 
under  the  initiative  or  the  referendum.  The  local  com- 
munity, the  state,  and  the  nation,  all  have  economic  prob- 
lems that  are  decided  by  the  vote  of  the  people.  The 
citizens  of  the  country  are  thus  called  upon  to  express  a 
definite  opinion  by  their  ballots  upon  many  difficult  and 
delicate  questions  of  economics. 

No  one  can  doubt  the  necessity,  therefore,  of  widespread 
information  and  knowledge  of  the  fundamental  principles 
of  economics  as  they  apply  in  everyday  affairs  of  the 
individual  and  the  community. 

Questions  and  Problems 

1.  Show  fully  why  it  is  necessary  to  maintain  order  in  a 

community  if  economic  activities  are  to  be  carried  on. 

2.  Show  why  it  is  necessary  to  enforce  contracts  by  law. 

What  would  be  the  effect  if  contracts  could  not  be 
enforced? 

3.  What  is  the  meaning  of  the  doctrine  of  laissez-faire? 

Give  local  examples. 

4.  What  are  the  advantages  and  disadvantages  of  govern- 

ment interference  in  regulating  business  activities? 

5.  In  what  ways  can  the  community  facilitate  economic 

activities? 

6.  In  what  ways  should  the  community  restrict  economic 

activities? 

7.  What  are  the  limits  of  community  help  or  restriction 

of  economic  activities? 


354      ECONOMICS  AND  THE  COMMUNITY 

8.  Why  is  it  necessary  to  regulate  corporations,  banking, 

insurance  ?     What  are  the  limits  of  such  regulation  ? 

9.  What  is  the  community's   interest  in  conservation  of 


resources 


10.  Has  a  mine-owner  the  moral  right  to  waste  coal  in  his 

mine  ?     Has  the  farmer  a  moral  right  to  exhaust  the 
fertility  of  his  soil? 

11.  What   measures   should   be   taken   to    protect   human 

beings?     Give  reasons  in  each  case. 

12.  Why  should  not  the  individual  be  left  to  look  out  for 

himself  ? 

13.  Why  should  the  production  of  essential  products  be 

promoted  ? 

14.  Should  non-essential  production  be  prohibited? 

15.  Show    why   the   community   should    provide   research 

laboratories  and  collect  statistics  for  industrial  use. 

16.  Summarize  what  the  state  should  and  should  not  do 

for  the  citizen. 

References 
Clay,  Economics  for  the  General  Reader,  Chapters  21-24. 


LIST  OF  BOOKS  TO  WHICH   REFERENCES 
ARE  MADE 

Beard,   Mary   R.     Short  History  of  the  American  Labor 

Movement.     Harcourt,  Brace  &  Co. 
Bird,  C.  S.,  Jr.     Town  Planning  for  Small  Communities. 

D.  Appleton  &  Co. 
Brisco,  N.  A.     Economics  of  Business.     Macmillan  Co. 
Carver,  T.  N.     Principles  of  Rural  Iiconomics.     Ginn  &  Co. 
Clay,  Henry.     Economics:  An  Introduction  for  the  General 

Reader.     Macmillan  Co. 
Commons,  J.  R.,  and  Andrews,  J.  B.     Principles  of  Labor 

Legislation  (revised  ed.).     Harper  &  Bros. 
Coulter,  J.  L.     Cooperation  Among  Farmers.     Macmillan. 
Davies.     Introduction  to  Economic  Statistics. 
Fetter,   F.  A.     Modern  Economic  Problems.     Century  Co. 
Fillebrown.  C.  B.     A. B.C.  of  Taxation.     C.  B.  Fillebrown 

(Boston). 
Galpin,  C.  J.     Rural  Life.     Century  Co. 
Goodnovv,  F.  J.,  and  Bates,  F.  G.     Municipal  Government. 

Century  Co. 
Harris,  E.  P.,  Wiers,  E.  S.,  and  Harris,  I-'lorence.     Coopera- 
tion, the  Hope  of  the  Consumer.     Macmillan  Co. 
Holdsworth,  J.  T.     Money  and  Banking.     D.  Appleton  & 

Co. 
Howe,  F.  C.     The  Modern  City  and  Its  Problems.     Charles 

Scribner's  Sons. 
Huebner,  G.  G.     Agricultural  Commerce.     D.  Appleton  & 

Co. 
Huebner,  S.  S.     Life  Insurance.     D.  Appleton  &  Co. 
Hunter,   M.   H.     Outlines  of  Public   Finance.     Harper   & 

Bros. 
Nolen,  John.     City  Planning.     D.  Appleton  &  Co. 
Plehn,  C.  C.     Introduction  to  Public  Finance.     Macmillan 

Co. 

355 


356      ECONOMICS  AND  THE  COMMUNITY 

Powell,  G.  H.     Cooperation  in  Agriculture.     Macmillan  Co. 

Ryan,  John  A.     A  Living  Wage.     Macmillan  Co. 

Ryan,  John  A.     Social  Reconstruction.     Macmillan  Co. 

Seager,  H.  R.     Social  Insurance.     Macmillan  Co. 

Secrist,  Horace.  Introduction  to  Statistical  Methods.  Mac- 
millan Co. 

Sharfman,  I.  L.  The  American  Railroad  Problem.  Cen- 
tury Co. 

Sparling,  S.  E.  Introduction  to  Business  Organisation. 
Macmillan  Co. 

Taylor,  H.  C.     Agricultural  Economics.     Macmillan  Co. 

Van  Hise,  C.  R.  The  Conservation  of  National  Resources 
in  the  United  States.     Macmillan  Co. 

Whipple,  G.  C.     Vital  Statistics.     John  Wiley  &  Sons. 


INDEX 


A  B  C  of  Taxation,  C.  B.  Fille- 

biown,  304 
Acceptances,  trade,  173-4 
Accident  insurance,  195,  197,  234 
Advertising,  and  production,  34 
Agricultural    Economics,    G.    G. 

Huebner,  262 
Agricultural    Economics,    H.    C. 

Taylor,  263 
Agricultural  finance,  255-6 
Agricultural  problems,  250-63 ; 
community  survey,  250;  de- 
crease of  workers,  251-2;  de- 
crease in  production,  252-3; 
farm  ownership,  253-5 ;  agri- 
cultural finance,  255-6;  farm 
loans  and  credit,  256;  the  Farm 
Loan  Act,  256-9;  short  time 
loans,  259-60;  cooperation 
among  farmers,  260-1  ;  rural 
transportation,  261-2;  questions 
and  problems,  262;  references, 
262-3 
Agricultural  production,  decrease 

in,  252-3 
Agricultural     products,      selling, 

56-60 
Agricultural  statistics,  325-7 
Agricultural     workers,    decrease 

of,  251-2 
Air  transportation,  99 
Alaskan  Railway,  339 
Ambassadors  and  ministers  and 

international  trade,  281 
American    Bankers'    Association, 

170 
American  Experience  Table,  191 
American   Federation   of   Labor, 

236 
American      Railroad      Problem, 
The,  \.  L.  Sharfman,  104 


Arbitration  of  labor  troubles, 
227-8 ;  compulsory,  228-9 

Articles  of  agreement,  72-3 

Assessment  insurance  companies, 
196 

Assessments,  special,  295 

Auction,  the,  64 

Automobile  insurance,  197-8 

Averages,  statistical,  330-1 

Balance  of  trade,  284-7 

Bank  Commissioiier,  183 

Bank  deposits,  guaranty  of,  182-3 

Bank  drafts,  170 

Banking,  164-186;  community 
survey,  164-5  '.  commercial  and 
non-commercial  banks,  166; 
trust  companies,  166-7;  com- 
mercial banks — deposits,  167-9; 
checks  and  drafts,  169-70;  bank 
drafts,  170;  travelers'  checks 
and  letters  of  credit,  170-2; 
bank  loans  and  credit,  172-3; 
trade  acceptances,  173-4;  do- 
mestic exchange,  174-6;  bank 
reserves,  176-7;  money  as  the 
basis  of  credit,  177-8;  the  clear- 
ing house,  178-30;  the  Federal 
Reserve  Banks,  180-2;  Federal 
Farm  Loan  Banks,  182 ;  Guar- 
anty of  bank  deposits,  182-3 ; 
supervision  of  banking,  183-5; 
questions  and  prolilcms,  185-6; 
references,     186;     control     of, 

3-^4-5 
Bank  loans  and  credit,  172-3 
Bank  reserves,  176-7 
Banks,  see  Banking 
Barge  canal,  New  York  State,  92 
I'asis  of  credit,  money  as,  177-8 
Basis  of  fair  taxation,  the,  295-8 


357 


358 


INDEX 


Beard,  Mary  R..  Short  History 
of  the  ^-imcrican  Labor  Move- 
ment. 2ib 

Bidding,  competitive.  65-6 

Bimetallism,  152-3 

Bird,  C.  S.,  Jr.,  Toxvn  Planning 
for  Small  Communities,  276 

Blacklist,  226-7 

Boiler  insurance,  198 

Bonds,  216-17 

Boycott  and  blacklist,  226-7 

Briscoe,  N.  A.,  Economics  cf 
Business.  68,  85 

Building  and  loan  associations, 
210-13 

Bureau  of  Standards,  351 

Burglary  insurance,  198 

Business,  importance  of  insur- 
ance to,  187-8;  effect  of  taxa- 
tion on.  298;  facilitating,  338-9; 
regulating  private.  340-3 

Business,  internal  organization  of 
a,  81-2;  departments  of  a,  82-3 

Business  organization,  69-85 ; 
community  survey,  69-70;  in- 
dividual organizers,  70;  part- 
nerships, 70-3;  the  corporation, 
74;  kinds  of  corporations,  74; 
the  private  stock  corporation, 
74-5;  capital  stock.  75-6;  pre- 
ferred stock,  76;  management 
of  a  corporation.  76-7 ;  advan- 
tages of  corporations,  78;  dis- 
advantages of  corporations,  78- 
9;  cooperative  organization, 
79-80;  public  ownership,  81; 
internal  organization  of  a  busi- 
ness, 81-2;  departments  of  a 
business  organization.  82-3; 
diagram  of  corporate  business 
organization.  84 ;  questions  and 
problems,      84-5;      references, 

85 
Buyers,  competition  of,  106-7 
Buying  and  selling  goods,  55-6 

Canals,  92-3 
Cape  Cod  canal,  92 
Capital,  and  production,  38 
Capital  stock,  75-6 
Carver,     T.     N.,     Principles    of 
Rural  Economics,  263;  316 


Census      Bureau ;      see     United 

States  Census  Bureau 
Changes    in    taxation,    proposed, 

300- 1 
Checks,    169-70;     certified,    169; 

cashier's,   170 
Chicago  Board  of  Trade,  59 
Chicago      Livestock      Exchange, 

59 

Cities,  the  economic  problems  of, 
264-76;  community  survey.  264; 
causes  of  city  growth,  264-9; 
lack  of  planning,  269;  prob- 
lems of  transportation,  269-71  ; 
street  planning,  271-2;  housing, 
272;  city  and  country,  272-4; 
the  planned  city,  274-5  i  ques- 
tions and  problems,  275 ;  refer- 
ences, 276 

Citizen,  interest  in  economics, 
11-12 

City  and  country,  272-4 

City  Planning,  John  Nolen,  276 

Clay,  Henry,  Economics  for  the 
General  Reader,  15,  31,  47,  115, 
134,  146,  163,  221,  290,  354 

Clayton  Act  on  trusts.  113 

Clearing-house,  the,  178-80 

Clearing-House  Association,  185 

Coal  conservation,  306-8 

Cold  storage.  52-3 

Commercial  and  non-commercial 
banks,  166 

Commercial  banks  —  deposits, 
167-9 

Common  stock.  219-20 

Commons.  J.  R.,  and  Andrews, 
J.  B.,  Principles  of  Labor  Leg- 
islation, 236 

Community  consumption,  23-4 

Community  economics,  see  Eco- 
nomics 

Competition  and  monopoly,  105- 
115;  community  survey,  105; 
competition  of  sellers.  105-6; 
competition  of  buyers,  106-7; 
difficulties  of  free  competition, 
107-8;  natural  monopoly,  108-9; 
private  monopoly,  109;  methods 
of  creating  monopoly,  109-I11; 
limits  of  monopoly,  111-12; 
trusts,  112;  trusts  and  the  law, 


INDEX 


359 


1 12-14;  remedy  for  trust  evils, 
114-15;  questions  and  problems, 
115;   references,    115 

Comptroller  of  the  Currency,  181, 
183;    Annual    Report,    186 

Conditions,   stability   of,   ;^Ti7 

Conservation,  305-18;  community 
survey,  305-6;  mineral,  306; 
coal,  306-8;  petroleum  and  nat- 
ural gas,  308-9;  metallic  re- 
sources, 310-11;  soil  resources, 
311-12;  forests,  312-14;  water 
resources,  314-15;  fish  and 
game  resources,  315;  human 
resources,  315-18;  questions 
and  problems,  318;  references, 
318.  346-7 

Conservation  of  National  Re- 
sources in  the  United  States, 
The.  C.  R.  Van  Hise,  318 

Consuls  and  agents  and  interna- 
tional trade,  280 

Consumer,   education    of,    29-30 

Consumers*  cooperation,  243 

Consumers'  needs,  ramifications 
of,  20-3 

Consumers'  part  in  determining 
value,  140-2 

Consumption,  16-31  ;  community 
survey,  16;  kinds  of  wants,  18- 
19;  partial  and  complete,  19-20; 
ramifications  of  consumers' 
needs,  20-3;  community,  23-4; 
demand  for  services,  24-5 ;  es- 
sential and  non-essential  goods, 
25-8;  education  of  the  con- 
sumer, 29-30 ;  questions  and 
problems,  30-1  ;  reference,  31  ; 
statistics  of,  320-3 

Contracts,  enforcement  of,  337-8 

Cooper  Shops,  Minneapolis,  239- 
40 

Cooperation,  237-49;  community 
survey,  237 ;  producers'  co- 
operation, 237-40;  cooperative 
distribution,  240-3 ;  consumers' 
cooperation,  243 ;  other  cooper- 
ative plans,  244 ;  complete  co- 
operative organization,  244-5  '< 
the  Rochdale  pioneers,  245-7; 
conditions  of  success  of  co- 
operation, 247-8;  questions  and 


problems,     248-9;      references, 

.249        .        . 
Cooperation    in    Agriculture,    G. 

H.  Powell,  249 
Cooperation  Among  Farmers,  J. 

L.  Coulter,  249 
Cooperation    the    Hope    of    the 

Consumer,  E.  P.  Harris,  E.  S. 

Wiers,    and    Florence    Harris, 

Cooperative  organization,  79-80 
Codperative  Union  Report,  247 
Cooperative    Wholesale    Society, 

England,  246 
Corporate  business  organization, 

diagram  of,  84 
Corporation,   the,   74;    kinds   of, 
74;  private  stock,  74-5;  capital 
stock,    75-6;    preferred    slock, 
76 ;     management,     76-7 ;     ad- 
vantages of,  7i<\  disadvantages 
of,  78-9;  diagram  of,  84;  con- 
trol of,  343-4 
Cost  of  living,  trend  of,  321 
Cosi-of-production      theory      of 

value,  138-40 
Coulter,      J,      L.,      Cooperation 

Among  Farmers,  249 
Credit,  money  as  basis  of,  177-8 

Davies,  Introduction  to  Eco- 
nomic Statistics.  332 

Debts,  public,  298-300 

Deferred  payments,  standard  of, 
15 1 -2 

Departments  of  a  business  organ- 
i--^ation,  82-3 

Deposits,  167-9 

Discrimination  in  transportation 
rates,  loo-i 

Distribution,  defects  of,  66-7;  co- 
operative, 240-3 ;  statistics  of, 
3 -'0-3 

Distribution  of  goods,  see  Goods 

Distribution  of  income,  see  In- 
come, Distribution  of 

Distributive  system,  modern,  50-2 

Domestic  exchange,  174-6 

Double  standar<l,  the,  152-3 

Drafts,  169-70 

Economic  problems  of  cities,  see 
Cities,  Economic  Problems  of 


36o 


INDEX 


Economic  vision,  clear,  352-3 
Economics,  community,  3-15; 
community  survey,  3-4;  special- 
ization of  labor,  4-5 ;  .specializa- 
tion by  communities  and 
countries,  5-9;  defined.  9-10; 
subject  matter  of,  10-11;  evils, 
control  of,  ii;  citizen's  in- 
terest in,  11-12;  and  the  com- 
munity, 13-14;  questions  and 
problems,  15;  reference,  15 
Economics    of    Business,    N.    A. 

Briscoe,  68,  85 
Economics      for      the       General 
Reader,  Henry  Clay,  15.  3 1.  47. 
115,  134,  146,  163,  221,  290,  354 
Education,  of  the  consumer,  29- 
30;     for    efficient    production, 
45-6 
Electric  railroad,  the,  94 
Elevator  accident  insurance,  198 
Employees    and   employers,   222- 
36;   community   survey,  222-3; 
collective     bargaining,     224-5 ; 
strikes     and     lockruts,     225-6; 
sympathetic  strikes,  226;   boy- 
cott and  blacklist,  226-7 '.  medi- 
ation    and     conciliation,     227; 
arbitration,  227-8;   compulsory 
arbitration,     228-9;     the    open 
and  closed  shop,  229;  minimum 
living  wages,  230;  profit  shar- 
ing, 230-1  ;   labor  participation 
in  management,  232;  unemploy- 
ment. 232-4 ;  health  and  safety, 
234;  hours  of  labor,  235;  ques- 
tions and  problems,  235-6;  ref- 
erences, 236 
Employers,  see  Employees 
Employers'     accident    insurance, 

197.  234 
Employment  bureaus,  233 
English  Life  Table,  191 
Enterpriser,  the,  69 
Entrepreneur,  the,  69 
Erie  canal,  92 
Essentials  and  non-essentials,  18; 

25-8;  347-50 
Evils,  economic,  control  of,   il 
Exchange,  domestic,  174-6 
Flxchangc,      international,      176, 

287;  rate  of,  287-8 


Excise  taxes,  293 

Experience      rating,      insurance, 

195-6 
Express,  98 

Factors  in  production,  37 
Factory  system,  and   production, 

40-1 
Farm-loan  associations,  258-9 
Farm  loans  and  credit,  256 
Farm  ownership.  253-5 
Farmers,      cooperation      among, 

260-1 
Federal    Farm    Loan    Act,    128, 

182,  244,  256-9 
Federal  Farm  Loan  Banks,  182 
Federal  Farm   Loan  Board,   182, 

257  ;  Annual  Report,  263 
Federal    Reserve    Act,    128,    159, 

345 
Federal  Reserve  Bank  notes,  161 
Federal  Reserve  banks,  159,  161. 

176,  180-2 
Federal  Reserve  Board,  27,   181, 
182,  183,  207;  reports  and  bul- 
letins, 186 
Federal  Reserve  notes,  159-61 
Federal  Trade  Commission  Act, 

1 13-4 

Fetter,  F.  A.,  Modern  Economic 
Problems,  104,  115,  163,  1S6, 
202,  221,  236,  262,  290,  304 

Fidelity  insurance,  198 

Fillebrown,  C.  B.,  A  B  C  of  Tax- 
ation. 304 

Fire  insurance,  193-4 

Fish  and  game  resources,  con- 
servation of,  315 

Foreign  traders,  protection  of, 
279-80 

Forests,  conservation  of,  312-14 

Franklin.  Benjamin,  95 

Fraternal  insurance  companies, 
196 

Free  coinage,  153 

Free  competition,  difficulties  of, 
107-8 

I'Veight,  special,  98 

Calpin,  C.  J.,  Rural  Life.  262 
Gambling  and  insurance,  188 
Gcphart,  Principles  of  Insurance, 
202 


INDEX 


361 


Gold  coin,  156;  certificates,  156-7 

Goodnow,  F.  J.,  and  Hates,  F.  G., 
Municipal  Governtiient,  276 

Goods,  distribution  of,  48-68; 
community  .urvey,  48;  simple 
forms  of,  48-9;  modem  system, 
50-2;  storaj,'c,  52-3;  terminals 
and  warehouses,  53-4;  trans- 
portation of  people,  54-5;  buy- 
ing and  selling  goods,  55-6; 
selling  agricultural  products, 
56-60;  jobbers  and  wholesalers, 
60-1 ;  the  mail  order  house,  61- 
2;  the  retailer,  62-3;  the  auc- 
tion, 64;  purchasing  systems, 
64-5;  competitive  bidding,  65-6; 
defects  of  distribution,  66-7; 
questions  and  problems,  67-8; 
references,  fcS 

Goods,  essential  and  non-essen- 
tial, 25-8;  importance  of,  34 

Greenbacks,   159,   162 

Growth  of  cities,  264-9 

Guaranty  of  bank  deposits,  182-3 

Harris,  E.  P.,  Wiers,  E.  S.,  and 
Harris,  Florence,  Cooperation 
the  Hope  of  the  Consumer,  249 

Health    and    accident    insurance, 

195 
Health   and    safety   of    workers, 

234 
Herrick,        Trust        Companies, 

166-7 
Highways,  88-9 
Holdsworth,    J.    T.,   Money   and 

Banking.  163,  186 
Hours  of  labor,  235 
Housing,  272 
Howe,  F.  C,   The  Modern  City 

and  Its  Problems,  276 
Huebner,     G.     G.,     Agricultural 

Economics,  262 
Huebner,   S.   S.,  Life  Insurance, 

202 
Human    resources,    conservation 

of,  315-18 
Hunter,  M.  U.,  Outlines  of  Public 

Finance,  304 

Imports  and  exports,  statistics 
of,  278 


Income,  distributioii  of,  116-34; 
community  survey,  1 16-7 ; 
wages,  1 17-8;  amount  of  the 
wage,  1 18-9;  minimum  wage, 
119-20;  fixing  of  wages,  120-1; 
rent,  120-5;  interest,  125-8; 
profits,  129-30;  distributing  the 
income,  131-3;  questions  and 
problems,      133-4;      reference, 

134 

Income  taxes,  292-3 

Index    numbers,   statistical,   329 

Individual  insurers,  196 

Inheritance  taxes,  294 

Institutions  for  savings  and  in- 
vestment, 204-7 

Insurance,  187-202;  community 
survey,  187;  importance  of.  to 
business,  187-8;  and  gambling, 
188;  kinds  of,  188;  marine, 
T88-9;  life,  189-92;  kinds  of 
policies  of  life,  IQ2-3;  war 
risk  life,  193;  fire,  193-4: 
health  and  accident.  195 ;  special 
hazards  and  experience  rating, 
195-6;  carriers,  196;  public  or 
social,  196-7;  other  forms  of 
insurance,  197-8;  prevention 
and,  198-9;  public  regulation, 
199-201  ;  questions  and  prob- 
lems, 201-2;  reference,  202; 
control  of,  345-6 

Insurance  as  savings,  213-14 

Insurance  statistics,  323-4 

Intercoastal  canal,  93 

Interest,  125-8 

Internal  organization  of  a  busi- 
ness, 81-2 

International  exchange,  176,  287; 
rate,  287-8 

International  trade,  277-90;  com- 
munity survey,  277-9 ;  protec- 
tion of  foreign  traders,  279-80; 
consuls  and  agents.  280;  am- 
bassadors and  ministers,  281  ; 
trade  restrictions,  281-2  ;  tariffs, 
282-4;  balance  of  trade,  284-7; 
international  exchange,  287 ; 
rate  of  exchange,  287-8;  raw 
materials  and,  288-0;  questions 
and  problems,  290;  references, 
290 


362 


INDEX 


Interstate  Commerce  Commis- 
sion, 100,  loi,  114,  340;  Re- 
port of,  104 

Introduction  to  Business  Organ- 
ization, S.  E.  Sparling,  47,  59, 
68.85 

Introduction  to  Economic  Statis- 
tics, Davies,  332 

Introduction  to  Public  Finance, 
C.  C.  Plehn,  304 

Introduction  to  Statistical  Meth- 
ods, Horace  Secrist,  332 

Investment,  see  Savings  and  In- 
vestment 

Jobbers  and  wholesalers.  60-1 

Kansas  Industrial  Court  Act,  229 

Land,  and  production,  27 

Labor,  and  production,  38;  di- 
vision of,  39-40 

Labor  participation  in  manage- 
ment, 232 

Labor,  specialization  of,  4-5 

Labor,  theory  of  value,  136-7 

Land  as  investment,  215-16 

Legal  tender,  161 -2 

Letters  of  credit,  170-2 

Liability  insurance,  197 

Liberty  bonds,  210 

Licenses,  294-5 

Life  insurance,  189-93 

Life  Insurance,  S.  S.  Huebner, 
202 

Living  Wage,  A,  John  A.  Ryan, 
236 

Loans  and  credit,  bank,  172-3 

Loans,  short-time,  to  farmers, 
259-60 

Lockouts,  225  ct  seq. 

Mail-order  house,  the,  61-2 
Management,     and     production, 

38-9 
Marginal  utility  and  values,  142 
Marme  insurance,  188-9 
Marx,  Karl,  136,  137 
Mediation    and    conciliation    in 

strikes,  227 
Medium  of  exchange,  money  as, 

147-9;    what     makes    a     good, 

149-50 


Metallic  resources,  conservation 
of,  310-11 

Middlemen,  66 

Migratory  Bird  Act,  315 

Mineral  conservation,  306 

Minneapolis  Chamber  of  Com- 
merce, 59 

Minor  coins,  158 

Modern  City  and  Its  Problems, 
The,  F.  C.  Howe,  276 

Modern  Economic  Problems,  F. 
A.  Fetter,  104,  115.  163,  186,202, 
221,  236,  262,  290,  304 

Money,  147-63;  community  sur- 
vey, 147 ;  as  a  medium  of  ex- 
change, 147-9;  what  makes  a 
good  medium  of  exchange,  149- 
50;  standard  of  value,  150-1 ; 
standard  of  deferred  payments, 
151-2;  the  single  standard,  152; 
the  double  standard — bimetal- 
lism, 152-3;  free  coinage,  153; 
paper  money,  154-5;  kinds  of 
money  in  the  United  States, 
155;  gold  coin,  156;  gold  cer- 
tificates, 156-7;  silver  dollars, 
157;  silver  certificates,  157-8; 
subsidiary  silver  and  minor 
coins,  158;  treasury  notes,  158; 
United  States  notes,  158-9;  Na- 
tional Bank  notes,  159;  Federal 
Reserve  notes,  159-61 ;  Federal 
Reserve  Bank  notes,  161  ;  legal 
tenders,  161-2;  questions  and 
problems,   162;  references,   163 

Money,  how  the  people  spent  it 
in   1900- 1902  and   1918-1919,  25 
Money  and  Banking,  J.  T.  Holds- 
worth,  163,  186 
Monopoly,  see   Competition   ind 

Monopoly 
Monopoly,  natural,  108-9;  private, 
109;  methods  of  creating,  109- 
III  ;  limits  of,  ni-12 
Monopoly  price,  144 
Mortgages,  216 
Motor  truck,  the,  95 
Municipal     Government,     F.     J. 
Coodnow  and  F.  G.  Bates,  276 
Mutual  fire  insurance  companies, 

194,  196 
Mutual  savings  banks,  205-6 


INDEX 


363 


National  Association  of  Manu- 
facturers, 236 

National  liank  notes,  159 

National   banks,    165 

National  Tax  Association,  Pro- 
ccedinijs,  304 

Natural  gas,  conservation  of, 
308-9 

New   Orleans   Cotton   Exchange, 

59 
New  York  Coffee  Exchange,  59 
New  York  Cotton  Exchange,  59 
New  York  Produce  ILxchange,  59 
Nolen,  John,  City  I'laiuiiny,  276 

Occupations     of     people    of    the 

United  States  in  1910,  4 
Open  and  closed  shop,  229 
Organizers,  individual,  70 
Outlines  of   Public  Finance,  M. 

H.  Hunter.  304 
Over-production,  44 

Panama  canal,  92,  339 
Paper  money,  154-5 
Parcel  post,  the,  97 
Partnerships,  70-3 
Petroleum  and  natural  gas,  con- 
servation of,  308-9 
Planned  city,  the,  274-5 
Planning,  lack  of,  in  growth  of 

cities,  269 
Plate  glass  insurance,  198 
Plelm,    C.    C,    Introduction    to 

Public  Finance.  304 
Policies,  kinds  of  life  insurance, 

192-3 
Poll  tax,  295 

Postal  savings  banks,  207-9 
Post-office  in  transportation,  95-7 
Powell,    G.    H.,    Cooperation    in 

Agriculture,  249 
Preferred  stock,  76 
Preferred  sto'jks,  217-19 
Prevention  and  insurance,  198-9 
Price,  see  Value  and  Price 
Price-fixing  by  law,  145 
Principles  of  Insurance,  Gephart, 

202 
Principles  of  Labor  Legislation, 

Commons  and  Andrews,  236 


Principles    of   Ptiral   Fconomics, 

T.  N.  Carver,  263 
Private  banks,  165 

Private  stock  corporation,  74-5 

Producers'  cooperation,  237-40 
Production,  32-47;  community 
survey,  32-3  ;  anticipates  wants, 
33-4;  advertising,  34;  impor- 
tance of  essential  goods,  34; 
types  of,  35-7;  factors  in.  37; 
land,  37-8;  labor,  38:  capital, 
38;  management,  38-9;  division 
of  labor,  39-40;  the  factory 
system,  40-1  ;  large  vs.  small 
scale,  42-3 ;  over-production, 
44;  education  for  efficient,  45-6 ; 
questions  and  problems,  47; 
references,  47 

Production,  essential  and  non-es- 
sential, 347-50 

Production,  specialization  in,  5-9 

Production,  statistics  of,  320-3 

Profit  sharing    230-1 

Profits,  129-30 

Public  debts,  298,  300 

Public  Health  bulletin,  327 

Public  ownership  of  enterprises, 
80 

Public    regulation    of    insurance, 
190-201 

Public   regulation  of  transporta- 
tion facilities.   101-2 

Public  or  social  insurance.  196-7 

Public  Utility  Commissions,  lOO 

Purchasing  systems,  64-5 


Railroad,  the,  93-4 
Railway  Labor  Board.  227 
Rates,  transportation.  99 
Rating,    insurance   experience, 

195-6 
Raw  materials  and  international 

trade,  288-9 
Rebates,  transportation,  loi 
Regulating    private    business, 

340-3  . 
Regulation   of   insurance,  public, 

199-201 
Regulation,  public,  of  transporta- 
tion facilities,  101-2 
Rent,  121-5 


3^4 


INDEX 


Research  and  statistics  and  social 

control,  350-2 
Reserves,  bank,  176-7 
Retailer,   the,   62-3 
Ricardo.  economist,  136 
Richmond     Tobacco     Exchange, 

59 
Rochdale  Pioneers,  the,  245-6 
Roosevelt,  Theodore,  301 
Rural  Life,  C.  J.  Galpin,  262 
Ryan,  John  A.,  A  Living  Wage, 

236 :   Social   Reconstruction, 

236 

Sault  Sainte  Marie  canal,  92 
Savings  and  investment,  203-21  ; 
community  survey,  203-4 ; 
limits  to  saving,  204;  institu- 
tions for  savings  and  invest- 
ment— savings  banks,  204-7 ; 
postal  savings  banks,  207-9; 
war  savings  stamps,  209-10; 
school  banks  and  penny  banks, 
210;  building  and  loan  associa- 
tions, 210-13;  insurance  as 
savings,  213-14;  investments, 
214-15;  investment  and  specu- 
lation, 215;  forms  of  invest- 
ment— land,  215-16;  mortgages, 
216;  bonds,  ?a6-\~;  preferred 
stocks,  217-19;  common  stock, 
219-20;  conclusion,  220;  ques- 
tions and  problems,  220-1  ;  ref- 
erences, 221 
Savings  banks,  165,  204-7 
Sale    of     production,     large    vs. 

small,  42-3 
School  and  penny  banks,  210 
Seager,  M.  R.,  Social  Insurance, 

202 
Secretary  of  the  Treasury,  181 
Secrist,   Horace,   Introduction   to 

Statistical  Methods,  232 
Sellers,  competition  of,  105-6 
Selling  goods,  55-6 
Services,    demand    for,   24-5 
Sharfman,   I.   L..   The  American 

Railroad    Problem,    104 
Sherman    Anti- 1  rust    Act,    112- 

13 

Shifting  and  incidence  of  taxa- 
tion, 302-3 


Short  History  of  the  American 
Labor  Movement,  Mary  R. 
Beard,  236 

Silver  dollars,  157;  certificates, 
157-8;  subsidiary  coins,  158 

Single  standard,  152 

Smith,  Adam,  EnijHsh  economist, 
39.  136 

Social  control,  333-54 ;  commu- 
nity survey,  333-7;  stability  of 
conditions,  337;  enforcement  of 
contracts,  337-8;  facilitating 
business,  338-9 ;  regulating  pri- 
vate business,  340-3 ;  regulation 
of  special  business  activities, 
343;  corporations,  343-4;  bank- 
ing, 344-5 ;  insurance,  345-6 ; 
conservation  of  resources,  346- 
7 ;  essential  and  non-essential 
production,  347-50;  research 
and  statistics.  350-2;  clear 
economic  vision,  352-3;  ques- 
tions and  problems,  353-4;  ref- 
erence, 354 

Social  control,  taxation  as, 
301-2 

Social  Insurance,  H.  R.  Seager, 
202 

Social  Reconstruction,  John  A. 
Ryan,  236 

Soil  resources,  conservation  of, 
311-12 

Sparling,  S.  E.,  Business  Or- 
ganization, 47,  59,  68,  85 

Special  insurance  hazards  and  ex- 
perience rating,  195-6 

Specialization,  of  labor,  4-5 ;  of 
production,  5-9 

Standard  of  deferred  payments, 
151-2 

Standard  of  value,  150-1 ;  single, 
152;  double,  152-3 

State  Banking  Department,  An- 
nual Report,  186 

State  banks,  165 

State  insurance,   196-7 

State  Public  Service  Commission, 
Report  of,  104 

State  Railroad  Commission,  Re- 
port of,  104 

State  Railway  Commissions,  100, 

lOI 


INDEX 


365 


Statistics.  319-32;  community  sur- 
vey, 319;  importance  of,  320; 
of  consumption,  production,  and 
distribution,  2^0-22;  insurance, 
323-4;  vital,  324-5;  agricultu- 
ral, 325-7;  presentation  of,  327; 
interpretation,  328;  index  num- 
bers, 329;  averages,  330;  ques-- 
tions  and  problems,  331  ;  refer- 
ences, 332 

Steamboat,  the,  93 

Stock,  capital,  75-6;  preferred,  76 

Stocks,   preferred,  217-19;   com- 
mon, 219-20 

Storage,  52-3 

Street  planning,  271-2 

Strikes  and  lockouts,  225  et  seq. 

Suez  canal,  92 

Superintendent  of  Banks,  183 

Supervision  of  bauking,  183-5 

Supply  and  demand,  effect  on 
values,  143-4 

Supreme  Court,  340 

Sympathetic  strikes,  226 

Tariffs,  282-4,  293 

Taxation,  291-304;  community 
survey,  291-2;  income  taxes, 
292-3 ;  excise  taxes,  293 ; 
tariffs,  293 ;  inheritance  taxes, 
294;  licenses,  294-5;  poU  tax, 
295  ;  special  assessments,  295  ; 
basis  of  fair,  295-8;  effect  of 
taxation  on  business,  298;  pub- 
lic debts,  298-300;  proposed 
changes  in,  300-1  ;as  social  con- 
trol, 301-2;  shifting  and  inci- 
dence, 302-3 ;  questions  and 
problems,  303-4;  references, 
304 

Taylor,  H.  C,  Agricultural  Eco- 
nomics, 263 

Telegraph  and  telephone,  97 

Terminals,  53-4 

Thrift  stamps,  209 

Title  insurance.  198 

Toicn  Planning  for  Small  Com- 
munities, C.  S.  Bird,  Jr.,  276 

Trade  acceptances,  173-4 

Trade,  balance  of,  284-7 

Trade,  international,  see  Inter- 
national Trade 


Trade   restrictions,   281-2 

Tradt-unions,    224-5 

Transportation,  86-104;  commu- 
nity survey,  86;  importance  of, 
86-7;  highways,  87-9;  develop- 
ment of,  90-1 ;  canals,  92-3  ;  the 
steamboat,  93;  the  railroad, 
93-4;  the  motor  truck,  95;  the 
post-office,  95-7 ;  the  telegraph 
and  telephone,  97 ;  the  parcel 
post,  97;  express  and  special 
freight,  98;  air  transportation, 
99;  rates,  99;  discrimination, 
100- 1 ;  rebates,  loi  ;  public  reg- 
ulation, 101-2;  future  of,  102- 
3;  questions  and  problems,  103- 
4;  references,  104 

Transportation,  a  major  eco- 
nomic problem  in  city  planning, 

269-71 
Transportation  of  people,  54-5 
Transportation,  rural,  261-2 
Travelers'  checks  and  letters  of 

credit,  170-2 
Treasury  notes,  158 
Trust  companies,  165,  166-7 
Trust  Companies,  Herrick,  166-7 
Trusts,  112;  and  the  law,  112-4; 

remedy  for  evils,  114-5 
Types  of  production,  35-7 

Unemployment,  232-4 

United  States  Bureau  of  Labor 
Statistics,  Monthly  Bulletin 
and  Special  Reports,  236 ; 
332 

L  nited  States  Census  Bureau,  39, 

191,     324,     325;     Statistics    of 

Manufactures,   332;    Mortality 

Statistics,  332 ;  Birth  Statistics, 

^332 

United  States  Department  of 
Agriculture,  Year  Book  of, 
263,  326,  332 

United  States  Department  of 
Agriculture,  Bureau  of  For- 
estry.  Annual   Reports,  318 

United  States  Department  of 
Commerce,  Bureau  of  Foreign 
and  Domestic  Commerce.  Re- 
ports, 290;  Statistical  Year 
Book,  332 


366 


INDEX 


United  States  Geological  Sur- 
vey. 307;  Annual  Reports,  318 

United  States,  kinds  of  money 
in.  155 

United  States  notes,  158-9 


\'aluc  and  price.  135-146;  com- 
inunity  survey,  135;  labor  the- 
ory of  value,  136-7;  cost-of- 
production  theory  of  value. 
138-40;  consumers'  part  in  de- 
termining value,  140-2;  mar- 
ginal utility,  142;  supply  and 
demand,  143-4;  monopoly 
price,  144;  price-fixing  by 
law.  145 ;  questions  and  prob- 
lems. 145-6;  reference,  146 

\'alue.  standard  of.    150-1 

V'an  Hise.  C.  R..  The  Conserva- 
tion of  .\'atifl)ial  Resources  in 
the  United  States,  318 

Vital  statistics,  324-5 


I'ital  Statistics,  G.  C.  Whipple, 
3^0.  332 

Wages,  1 17-8;  amount  of,  118-9; 
minimum,     119-20;    fixing    of, 
1 20- 1 
Wages,  minimum  living,  230 
•Wants,   kinds    of,    18-19;    antici- 
pated by  production.  33-4 
Warehouse      receipts      and      the 

farmer.  259-60 
Warehouses,  53-4 
War  Labor  Board,  227 
War  risk  life  insurance,  193 
War  savings  stamps,  209-10 
Water  resources,  conservation  of. 

314-15 

Welland  canal.  92 

Whipple.  G.  C,  l^ital  Statistics, 
320.  S32 

Wholesalers.  60-1 

Workmen's  compensation  for  in- 
dustrial accidents,  234 


UNIVERSITY   OF   CALIFORNIA.  LOS   ANGELES 

THE  UNIVERSITi'  LIBRARY 

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